/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Question BE18-6 Nair Corp. enters into a contrac... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

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

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

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 manufacture winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches during 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

How much additional sales revenue is recognized by Hale in 2018, assuming 4,500 bonus points are redeemed?

Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer鈥檚 journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.

(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.

Instructions

(a) Determine the transaction price of the arrangement for Blair Biotech.

(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.

Guillen, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process \)1,715,000, Accounts Receivable \(240,000, and Billings on Construction in Process \)1,000,000. Indicate how these accounts would be reported in Guillen鈥檚 December 31, 2017, balance sheet.

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019鈥�2020) for \)800.
See all solutions

Recommended explanations on Business Studies Textbooks

Human 91影视

Read Explanation

Organizational Communication

Read Explanation

Actuarial Science in Business

Read Explanation

Insurance

Read Explanation

Startups

Read Explanation

Strategic Analysis

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.