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Chapter 18: Q18-3P-4 (page 1041)

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.

On October 1, 2017, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local builder. The builder plans to install it in one of its “Parade of Homes” houses. Grill Master accepted a 3-year, zero-interest-bearing note with face amount of \(5,324. The grill has an inventory cost of \)2,700. An interest rate of 10% is an appropriate market rate of interest for this customer. Prepare the journal entries on October 1, 2017, and December 31, 2017.

Short Answer

Expert verified

Answer

Both sides of the journal totals$8,124.

Step by step solution

01

Definition of Zero-Interest-Bearing-Note

The notes issued by the business entity that does not contains any coupon rate are known as a zero-interest-bearing note. Such notes are originally issued at a value lower than face value and then redeemed at par.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

1 Oct 2017

Note receivable

$5,324

Discount on notes receivable

$1,324

Sales revenue (PVF:0.7513)

$4,000

1 Oct 2017

Cost of goods sold

$2,700

Inventory

$2,700

31 Dec 2017

Discount on note receivable

$100

Interest revenue

$100

$8,124

$8,124

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Most popular questions from this chapter

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

How do companies recognize revenue from a performance obligation over time?

(Allocate Transaction Price) Crankshaft Company manufactures equipment. Crankshaft’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from \(200,000 to \)1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Crankshaft has the following arrangement with Winkerbean Inc.

• Winkerbean purchases equipment from Crankshaft for a price of \(1,000,000 and contracts with Crankshaft to install the equipment. Crankshaft charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Crankshaft determines installation service is estimated to have a standalone selling price of \)50,000. The cost of the equipment is \(600,000.

• Winkerbean is obligated to pay Crankshaft the \)1,000,000 upon the delivery and installation of the equipment.

Crankshaft delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.

Instructions

(a) How should the transaction price of $1,000,000 be allocated among the service obligations?

(b) Prepare the journal entries for Crankshaft for this revenue arrangement on June 1, 2017 and September 30, 2017, assuming Crankshaft receives payment when installation is completed.

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.

What methods are used in practice to determine the extent of progress toward completion? Identify some “input measures” and some “output measures” that might be used to determine the extent of progress.
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