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P18-4 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy’s main products are as follows

Item	Standalone Selling price (cost)
Refrigerator	\(500 (\)260)
Range	560 (275)
Stackable washer/dryer unit	700 (400)

Customers can contract to purchase either individually at the stated prices or a three-item bundle with a price of $1,800. The bundle price includes delivery and installation. The economy also provides installation (not a separate performance obligation).

Instructions

Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co.

Epic Rentals would like to take advantage of the bundle price for its 400-unit project; on February 1, 2017, the Economy signed a contract with Epic for 400 bundles. Under the agreement, the Economy will hold the appliance bundles in its warehouses until the new rental units are ready for installation. Epic pays 10% cash at contract signing. On April 1, 2017, Economy completes manufacture of the appliances in the Epic bundle order and places them in the warehouse. Economy and Epic have documented the warehouse arrangement and identified the units designated for Epic. The units are ready to ship, and Economy may not sell these units to other customers. Prepare journal entries for Economy on (1) February 1, 2017, and (2) April 1, 2017.

Step by step solution

01

Definition of Contract

An agreement between individuals or businesses that create legal bindings is a contract. Both parties must perform obligations on their end; otherwise, the party responsible for breach of contract is charged with a penalty.

02

Journal entries

Date	Accounts and Explanation	Debit $	Credit $
1 Feb 2017	Cash ($1800 x 400 x 10%)	$72,000
	Unearned sales revenue		$72,000
1 April 2017	Accounts receivables	$648,000
	Unearned sales revenue	$72,000
	Sales revenue		$720,000
1 April 2017	Cost of goods sold (($260 + $275 + $400) x $400)	$374,000
	Ending inventory		$374,000
		$1,166,000	$1,166,000

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