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Chapter 18: Question BE18-6 (page 1032)

Nair Corp. enters into a contract with a customer to build an apartment building for \(1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of \)150,000 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability

August 1, 2018 70%

August 8, 2018 20

August 15, 2018 5

After August 15, 2018 5

Determine the transaction price for this contract.

Short Answer

Expert verified

Transaction pricefor this contract is $1,127,500.

Step by step solution

01

Meaning of Performance Bonus

Aperformance bonus is a sort of additional remuneration given to an individual or department as a reward for meeting established goals.

02

Transaction price of this contract

Apartment building cost (price of contract) = $1,000,000

Bonus by August 1, 2018 = $150,000

Probability by August 1, 2018 = 70%

PricebyAugust1,2018=Priceofcontract+Bonus脳Probability=$1,000,000$150,000脳70%=$1,150,000脳70100=$805,000

Bonus by August 8, 2018 = $100,000

Probability by August 8, 2018 = 20%

role="math" localid="1648280899411" PricebyAugust8,2018=Priceofcontarct+Bonus脳Probability=$1,000,000+$100,000脳20%=$1,100,000脳20100=$220,000

Bonus by August 15, 2018 = $50,000

Probability by August 15, 2018 = 5%

PricebyAugust15,2018=Priceofcontract+Bonus脳Probability=$1,000,000+$50,000脳5%=$1,050,000脳5100=$52,500

Bonus after August 15, 2018 = $0

Probability after August 15, 2018 = 5%

PriceafterAugust15,2018=PriceofContract+Bonus脳Probability=$1,000,000+$0脳5%=$1,000,000脳5100=$50,000

TransactionPrice=PricebyAugust1+PricebyAugust8+PricebyAugust15+PriceafterAugust15=$805,000+$220,000+$52,500+$50,000=$1,127,500

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Most popular questions from this chapter

On May 3, 2017, Eisler Company consigned 80 freezers, costing \(500 each, to Remmers Company. The cost of shipping the freezers amounted to \)840 and was paid by Eisler Company. On December 30, 2017, a report was received from the consignee, indicating that 40 freezers had been sold for \(750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of \)200, and total installation costs of $320 on the freezers sold.

Instructions

(a) Compute the inventory value of the units unsold in the hands of the consignee.

(b) Compute the profit for the consignor for the units sold.

(c) Compute the amount of cash that will be remitted by the consignee.

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鈥檚 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.

On June 1, 2017, Economy sold 100 washer/dryer units without installation to Laplante Rentals for \)70,000. Laplante is a newer customer and is unsure how this product will work in its older rental units. Economy offers a 60-day return privilege and estimates, based on prior experience with sales on this product, that 4% of the units will be returned. Prepare the journal entries for the sale and related cost of goods sold on June 1, 2017.

P18-6 (LO3) (Warranty, Customer Loyalty Program) Hale Hardware takes pride as the 鈥渟hop around the corner鈥� that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired, local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line.

1. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufactured winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches in 2017 at a total price of \(21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is \)16,000. The assurance warranties extend for a 3-year period with an estimated cost of \(2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for \)400 each.

2. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every \(10 of purchases on a select group of Hale products. Each point is redeemable for a \)1 discount on any purchases of Hale merchandise in the following 2 years. During 2017, customers purchased select group products for \(100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is \)100,000. Based on prior experience with incentives programs Problems 1045 like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points).

Instructions

(b) Prepare the journal entries for Hale related to the sales of Hale winches with warranties.

Explain the importance of a contract in the revenue recognition process.

(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.
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