Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 18: Q. 18-32E-2 (page 1040)

E18-32 (LO4) (Contract Costs, Collectibility) Refer to the information in E18-31.

Instructions

Dan’s Demolition is a startup company; as a result, there is more than insignificant uncertainty about Dan’s ability to make the 6-month payments on time. Does this uncertainty affect the amount of revenue to be recognized under the contract? Explain

Short Answer

Expert verified

Theprobability of collection of payment does not affect revenue recognition.

Step by step solution

01

Definition of Revenue Recognition

Revenue recognition is the principle stated under accounting that provides information regarding the different conditions under which the revenue must be recognized.

02

Effect of Ability to Make Payment on Revenue to be Recognized

The collectability of the payment from Dan will not affect the revenue recognized by Rex. The revenue must be reported at its gross amount, and then the business entity can make adjustments for any bad debt in the income statement. Suppose there is any doubt regarding the collectability of the revenue on the contract. In that case, it is assumed that parties are not performing their obligations, and the revenue must not be recognized until the issue is resolved.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Jansen Corporation shipped \(20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of \)2,000. Gooch Company paid \(500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for \)21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen’s journal entry when the cash is received.

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

On January 2, 2017, Adani Inc. sells goods to Geo Company in exchange for a zero-interest-bearing note with face value of \(11,000, with payment due in 12 months. The fair value of the goods at the date of sale is \)10,000 (cost $6,000). Prepare the journal entry to record this transaction on January 2, 2017. How much total revenue should be recognized in 2017?

Zagat Inc. enters into an agreement on March 1, 2017, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2017, at the original sales price of $200,000 plus 2%.

Instructions

(a) Prepare Zagat’s journal entry necessary on March 1, 2017.

(b) Prepare Zagat’s journal entry for the repurchase of the ingots on May 1, 2017.

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(a) Prepare the journal entries (if any) to record the sale on January 2, 2017.

See all solutions

Recommended explanations on Business Studies Textbooks

Intermediate Accounting

Read Explanation

Managers

Read Explanation

Change Management

Read Explanation

Corporate Finance

Read Explanation

Introduction to Business

Read Explanation

Influences On Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free