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Chapter 18: Q18-5P_1 (page 1044)

P18-5 (LO2,3,4) (Allocate Transaction Price, Returns, and Consignments) Ritt Ranch & Farm is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Ritt’s products. Pricing and cost information on three of Ritt’s most popular products are as follows.

Item

Standalone selling price (Cost)

Mini-trencher

\(3,600 (2,000)

Power fence hole auger

\)1,200 (800)

Grain/Hay dryer

\(14,000 (11,000)

Instructions

Respond to the requirements related to the following independent revenue arrangements for Ritt Ranch & Farm.

(a) On January 1, 2017, Ritt sells 40 augers to Mills Farm & Fleet for \)48,000. Mills signs a 6-month note at an annual interest rate of 12%. Ritt allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Ritt estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Ritt’s costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entry for Ritt on January 1, 2017.

Short Answer

Expert verified

The total for both sides of the journal under each method is$80,000.

Step by step solution

01

Definition of Refund Liability

The amount of money that a business entity expects will be refunded to the customer in the future is reported as refund liability.

02

Journal entries

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Note receivable

$48,000

Sales revenue

$48,000

1 Jan 2017

Cost of goods sold

$32,000

Inventory

(40 x $800)

$32,000

$80,000

$80,000

Journal entries under net method

1 Jan 2017

Note receivable

$48,000

Refund liability ($48000 x 5%)

$2,400

Sales revenue

$45,600

1 Jan 2017

Cost of goods sold

$30,400

Estimated returns (40 x $800 x 5%)

$1,600

Inventory (40 x $800)

$32,000

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Most popular questions from this chapter

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for \(50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of \)900. At December 31, 2017, Grando estimates that \(650 of warranty costs will be incurred in the second year of the warranty.

Instructions

(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).

(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for \)800.

(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.

Instructions

(a) Determine the transaction price of the arrangement for Blair Biotech.

(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.

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?

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(a) Prepare any journal entries to record the revenue arrangement for Tablet Bundle A on January 2, 2017, and December 31, 2017.
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