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Chapter 18: Q18-11E (page 1036)

Refer to the revenue arrangement in E18-10. Repeat the requirements, assuming (a) Geraths estimates the standalone selling price of the installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the standalone selling price of the installation. (Round amounts to nearest dollar.)

Short Answer

Expert verified

Answer

Revenues recognized by the company is$2,400.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Revenue Recognition

In accounting, revenue recognition is a principle that facilitates business entitiesto identify when and in which specific condition revenues should be recognized and recorded in the books of accounts.

02

Computation of revenue recognized

Particulars

Amount ($)

Price of window

2,000

Add: Installation [$400+ ($400*20%)]

480

Total cost of window

2,480

Allocation:

Windows (2,000/2,480)*2,400

1,935

Add: Installation (480/2,480)*2,400

465

Revenue recognized

$2,400

Journal Entries:

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

July 1

No entry

Sep 1

Cash

2,000

Accounts receivable

400

Unearned service revenue

465

Sales revenue

1,935

(To record the sales)

Sep 1

Cost of goods sold

1,100

Inventory

1,100

(To record the cost of goods sold)

Oct 15

Cash

400

Unearned service revenue

465

Service revenue (Installation)

465

Accounts receivable

400

(To record the receipt of payment)

03

Solution when Geraths in unable to develop a reliable estimate

A residual approach should be applied when Geraths is unable to estimate the cost for installation. Under this approach, the total fair value of the contract is $2,400, and it is given that windows have a standalone fair value of $2,000,then $400 must be allocated to the installation.

Journal Entries:

Date

Accounts and Explanation

Debit ($)

Credit ($)

2017

Sep 1

Cash

2,000

Accounts receivable

400

Unearned service revenue

400

Sales revenue

2,000

(To record the sales)

Oct 15

Cash

400

Unearned service revenue

400

Service revenue (Installation)

400

Accounts receivable

400

(To record the receipt of payment)

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Most popular questions from this chapter

(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

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

Explain the importance of a contract in the revenue recognition process.

(Determine Transaction Price) Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of \(100 on January 2, 2017. In addition, Aaron will receive an additional commission of \)10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Instructions

(a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold.

(b) Determine the revenue that Aaron will recognize in 2017.

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What is a performance obligation? Under what conditions does a performance obligation exist?
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