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Chapter 18: Q18-3P-1 (page 1043)

Question: P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.

Instructions

Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer’s gas line for a total price \(800. On a standalone basis, the grill sells for \)700 (cost \(425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is \)150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2017, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2017. Prepare journal entries for Grill Master for GM205 in April and May 2017.

Short Answer

Expert verified

Answer

Both sides of the journal totals$20,250.

Step by step solution

01

Definition of Cost of Goods Sold

The line item representing the total sacrifices made by the business entity in the production process of the goods sold to the customer is known as the cost of goods sold.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

20 April 2017

Cash

$8,000

Unearned service revenue

$1,412

Unearned sales revenue

$6,588

15 May 2017

Unearned service revenue

$1,412

Unearned sales revenue

$6,588

Service revenue

$1,412

Sales revenue

$6,588

15 May 2017

Cost of goods sold

$4,250

Inventory

$4,250

$20,250

$20,250

Working note:
Allocation of total revenue: $8,000

Particular

Cost

/

Total cost

X

Total revenue

=

Allocated revenue

Equipment

$7,000

/

$8,500

X

$8,000

=

$6,588

Installation

$1,500

/

$8,500

X

$8,000

=

$1,412

$8,000

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Most popular questions from this chapter

On May 1, 2017, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2017. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2017. Eric pays on June 15, 2017, and Mount delivers the product on September 30, 2017. Prepare the journal entries required for Mount in 2017.

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.

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 –0–

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

(b) Prepare all necessary journal entries for 2018.

(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

What is the nature of a sale on consignment?
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