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Chapter 18: 30E_a (page 1040)

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

Short Answer

Expert verified

Service revenue each year is $10,000.

Step by step solution

01

Service Contract

Aservice contractis an agreement between a client and a service provider. A service contract is often anat-will arrangementwith no set expiration date and the ability for both parties to cancel at any time.

02

Journal entries for Tyler in 2017 and 2018

Date

Particular

Debit ($)

Credit ($)

January 1, 2017

Cash a/c

10,000

Unearned revenue a/c

10,000

December 31, 2017

Unearned revenue a/c

10,000

Service revenue a/c

10,000

January 1, 2018

Cash a/c

10,000

Unearned revenue a/c

10,000

December 31, 2018

Unearned revenue a/c

10,000

Service revenue a/c

10,000

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Most popular questions from this chapter

Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers can purchase any combination of equipment, installation services, and training as part of Fuhremann’s security services. Thus, each of these performance obligations is separate from individual standalone selling prices. Laplante Inc. purchased cameras, installation, and training at a total price of \(80,000. Estimated standalone selling prices of the equipment, installation, and training are \)90,000, \(7,000, and \)3,000, respectively. How should the transaction price be allocated to the equipment, installation, and training?

What are some examples of variable consideration? What are the two approaches for estimating variable consideration?

(Gross Profit on Uncompleted Contract) On April 1, 2017, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of \(2,000,000. The fixed fee stipulated in the contract is \)450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2017, Dougherty incurred costs of \(800,000 related to the project. The estimated cost at December 31, 2017, to complete the contract is \)1,200,000. Altom was billed $600,000 under the contract.

Instructions

Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2017. Show supporting computations in good form.

(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.

(Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of \(8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(a) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement.

(b) Prepare journal entries for Campbell for 2017-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of \)3,600.

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.
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