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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

Manual Company sells goods to Nolan Company during 2017. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?

Explain the accounting for contract modifications.

On May 3, 2017, Eisler Company consigned 80 freezers, costing \(500 each, to Remmers Company. The cost of shipping the freezers amounted to \)840 and was paid by Eisler Company. On December 30, 2017, a report was received from the consignee, indicating that 40 freezers had been sold for \(750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of \)200, and total installation costs of $320 on the freezers sold.

Instructions

(a) Compute the inventory value of the units unsold in the hands of the consignee.

(b) Compute the profit for the consignor for the units sold.

(c) Compute the amount of cash that will be remitted by the consignee.

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Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.
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