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Chapter 18: 7BE (page 1032)

Referring to the revenue arrangement in BE18-6, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2018, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2018), and (b) Nair has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Short Answer

Expert verified

(a) Transaction price of $1,150,000.

(b) No transaction price.

Step by step solution

01

Definition of Transaction Price

The amount of money that a business entity will collect against the product or service provided to the customer is known as the transaction price.

02

Determination of the Transaction Price

(a) Since the chances of completing the building on 1 August 2018 is 70%, the company will report $1,150,000 as the transaction price.

(b) There is very limited information available for developing the completion estimates. Therefore, the business entity will not recognize any revenue until the completion of the project.

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Most popular questions from this chapter

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.

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.

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

(Determine Transaction Price) Bill Amends, owner of Real Estate Inc., buys and sells commercial properties. Recently, he sold land for \(3,000,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the \)3,000,000 sales price, Blackhawk Group agrees to pay Real Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is \(1,000,000 a year. Given the substantial increase in online sales that are occurring in the retail market, Bill had originally indicated that he would prefer a higher price for the land instead of the 1% royalty arrangement and suggested a price of \)3,250,000. However, Blackhawk would not agree to those terms.

Instructions

What is the transaction price for the land and related royalty payment that Real Estate Inc. should record?

Describe the revenue recognition principle.
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