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Chapter 18: Question BE18-22 (page 1034)

Turner, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. During 2017, Turner, Inc. incurred costs of \)1,700,000, billed its customers for \(1,200,000, and collected \)960,000. At December 31, 2017, the estimated additional costs to complete the project total $3,300,000. Prepare Turner鈥檚 2017 journal entries using the percentage-of-completion method.

Short Answer

Expert verified

Revenue generated from this contract is $2,380,000.

Step by step solution

01

Meaning of Percentage-of-Completion Method

As a corporation approaches the end of a long-term contract, the percentage-of-completion technique is used to calculate revenues, expenditures, and gross profit. Deferring recognition of these items until the contract's end distorts the effort (costs) and outcomes of the accounting periods (revenues).

02

Journal entries of Turner Inc. in 2017

Date

Particular

Debit ($)

Credit ($)

Construction in process a/c

1,700,000

To Materials, Cash, Payables a/c

1,700,000

Accounts receivables a/c

1,200,000

To Billings on construction in process a/c

1,200,000

Cash a/c

960,000

To Accounts receivables a/c

960,000

Construction in process a/c

680,000

Construction expenses a/c

1,700,000

To Revenue from contract a/c

2,380,000

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Most popular questions from this chapter

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

On January 2, 2017, Adani Inc. sells goods to Geo Company in exchange for a zero-interest-bearing note with face value of \(11,000, with payment due in 12 months. The fair value of the goods at the date of sale is \)10,000 (cost $6,000). Prepare the journal entry to record this transaction on January 2, 2017. How much total revenue should be recognized in 2017?

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

(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.

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(a) Prepare any journal entries to record the revenue arrangement for Tablet Bundle A on January 2, 2017, and December 31, 2017.
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