In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

Step by step solution

01

Meaning of Contract Modification

A contract modification is a revision, adjustment, or alteration to the scope or price (or both) of a contract that adds or alters existing rights or duties.

02

Journal entries for sale of 90 stations

Date	Particular	Debit ($)	Credit ($)
	Cash a/c	9,000
	Sales revenue a/c		9,000
	Cost of goods sold a/c	4,860
	Inventory a/c		4,860

Working Notes:

$\begin{array}{rcl}\mathrm{Sales}\mathrm{revenue}& =& \mathrm{Units}\mathrm{delivered}\times \mathrm{Selling}\mathrm{price}\mathrm{per}\mathrm{unit}\\ & =& 90\times \$100\\ & =& \$9,000\\ \mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Units}\mathrm{delivered}\times \mathrm{Cost}\mathrm{per}\mathrm{unit}\\ & =& 90\times \$54\\ & =& \$4,860\end{array}$

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