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Chapter 18: Q2P_a (page 1043)

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

Short Answer

Expert verified

Revenue is $3,600.

Step by step solution

01

Meaning of Contract Modification

Acontract modification occurs if the contractual parties agree to modify the existing terms of a contract. Contract modification can only be legal if both parties sign the acceptance of modification.

02

Journal entries when the contract signed

Date

Particular

Debit ($)

Credit ($)

January 2, 2019

Cash a/c

3,600

Unearned service revenue a/c

3,600

Working Notes:

The services supplied during the extended time are the same as those given during the initial contract period. The adjustments will be deemed part of the original contract because they are not separate.

Unearnedrevenue=Extendedcontract脳Price=40脳$90=$3,600

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Most popular questions from this chapter

Explain the accounting for sales with the right of return.

Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is \(70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits \)65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.

E18-37 (LO5,6) (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Yanmei Construction Company began operations on January 1, 2017. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of \(4,500,000. The total contract price for construction of the facility is \)6,000,000. During the year, Yanmei incurred \(1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is \)4,204,200. Lundquist Corp. was billed and paid 25% of the contract price.

Instructions

Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2017, and the amount to be shown as 鈥渃osts and recognized profit in excess of billings鈥� or 鈥渂illings in excess of costs and recognized profit鈥� at December 31, 2017, under each of the following methods. Show supporting computations in good form.

(a) Completed-contract method.

(b) Percentage-of-completion method.

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer鈥檚 expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

Instructions

(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) On July 1, 2017, Uddin shipped books invoiced at \(15,000,000 (cost \)12,000,000). Prepare the journal entry to record this transaction.

(d) On October 3, 2017, \(1.5 million of the invoiced July sales were returned according to the return policy, and the remaining \)13.5 million was paid. Prepare the journal entries for the return and payment.

(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.

(Contract Costs) Rex鈥檚 Reclaimers entered into a contract with Dan鈥檚 Demolition to manage the processing of recycled materials on Dan鈥檚 various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex鈥檚 incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex鈥檚 also designs and builds receptacles and loading equipment that interfaces with Dan鈥檚 demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex鈥檚 and can be used for other projects. Dan鈥檚 promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex鈥檚 incurs the following costs: design services for the receptacles to interface with Dan鈥檚 equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan鈥檚 projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex鈥檚 Reclaimers revenue arrangement with Dan鈥檚 Demolition.

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