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Chapter 18: Question E18-3 (page 1034)

(Existence of a Contract) On May 1, 2017, Richardson Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of \(900 in advance on May 15, 2017. Kickapoo pays Richardson on May 15, 2017, and Richardson delivers the mower (with cost of \)575) on May 31, 2017.

Instructions

(a) Prepare the journal entry on May 1, 2017, for Richardson.

(b) Prepare the journal entry on May 15, 2017, for Richardson.

(c) Prepare the journal entry on May 31, 2017, for Richardson.

Short Answer

Expert verified

On May 1, 2017, there will be no entry.

Step by step solution

01

Meaning of Contract Price                

It refers to the cost of the products or services that will be provided under the contract. Contract priceaids in the determination of whether or not a contract exists. If the contract price is not contained in the written contract, the court may determine that there was no contract.

02

Journal entries for Richardson Inc.

Date

Particular

Debit ($)

Credit ($)

May 1, 2017

No entry

May 15, 2017

Cash a/c

900

Unearned sales revenue a/c

900

May 31, 2017

Unearned sales revenue a/c

900

Sales revenue a/c

900

May 31, 2017

Cost of goods sold a/c

575

Inventory a/c

575

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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:

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