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Chapter 18: Question E18-16 (page 1037)

(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.

Short Answer

Expert verified

Sales revenue is $10,000

Step by step solution

01

Meaning of Income Statement

A business report that provides detailed information for revenue and expenses incurred by a company in the course of its normal operations is known as an income statement.

02

Journal entries for Steele

Date

Particular

Debit ($)

Credit ($)

March 10, 2017

Accounts receivables a/c

10,000

Sales revenue a/c

10,000

March 10, 2017

Cost of goods sold a/c

6,000

Inventory a/c

6,000

March 25, 2017

Sales return a/c

500

Accounts receivables a/c

500

March 31, 2017

Returned inventory a/c

300

Cost of goods sold a/c

300

Working Notes:

The price of each toolset is $50

The cost of each toolset is $30

Toolsets sold = 200

Toolsets returned = 10

Accountsreceivables=No.oftoolsetssold脳Priceofeachtoolset=200脳$50=$10,000

Costofgoodssold=no.oftoolsetssold脳Costofeachtoolset=200脳$30=$6,000

Salesreturn=No.oftoolsetsreturned脳Priceofeachtoolset=10脳$50=$500

Returnedinventory=No.oftoolsetsreturned脳Costofeachtoolset=10脳$30=$300

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Most popular questions from this chapter

P18-7 (LO3) (Customer Loyalty Program) Martz Inc. has a customer loyalty program that rewards a customer with 1 customer loyalty point for every \(10 of purchases. Each point is redeemable for a \)3 discount on any future purchases. On July 2, 2017, customers purchase products for \(300,000 (with a cost of \)171,000) and earn 30,000 points redeemable for future purchases. Martz expects 25,000 points to be redeemed. Martz estimates a standalone selling price of \(2.50 per point (or \)75,000 total) on the basis of the likelihood of redemption. The points provide a material right to customers that they would not receive without entering into a contract. As a result, Martz concludes that the points are a separate performance obligation.

Instructions

Prepare the journal entries to record the sale of the product and related points on July 2, 2017.

Question: P18-12 (LO8) (Franchise Revenue) Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions.

1. The franchisee is charged an initial fee of \(120,000. Of this amount, \)20,000 is payable when the agreement is signed, and a \(100,000 zero-interest-bearing note is payable with a \)20,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of \(20,000, each discounted at 10%, is \)75,816.

2. All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation cancelled if, for any reason, the franchisee fails to open his or her franchise.

3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Amigos helps maintain the brand value of the franchise.

4. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least \(20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%.

Instructions

(b) Prepare the journal entries for the initial and continuing franchise fees, assuming:

(1) Franchise agreement is signed on January 5, 2017.

(2) Amigos completes franchise startup tasks and the franchise opens on July 1, 2017.

(3) The franchisee records \)260,000 in sales in the first 6 months of operations and remits the monthly franchise fee on December 31, 2017.

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

(Determine Transaction Price) Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2018. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2018. Under a new policy, if payment for 2019 season slips is made by December 31, 2018, a 5% discount is allowed. If payment for 2020 season slips is made by December 31, 2018, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).

On December 31, 2017, all 300 slips for the 2018 season were rented at full price. On December 31, 2018, 200 slips were reserved and paid for the 2019 boating season, and 60 slips were reserved and paid for the 2020 boating season.

Instructions

(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.

(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.

Refer to the revenue arrangement in E18-16. Assume that instead of selling the tool sets on credit, that Steele sold them for cash.

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 sale.
See all solutions

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