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.

(c) Ritt sells three grain/hay dryers to a local farmer at a total contract price of \)45,200. In addition to the dryers, Ritt provides installation, which has a standalone selling price of \(1,000 per unit installed. The contract payment also includes a \)1,200 maintenance plan for the dryers for 3 years after installation. Ritt signs the contract on June 20, 2017, and receives a 20% down payment from the farmer. The dryers are delivered and installed on October 1, 2017, and full payment is made to Ritt. Prepare the journal entries for Ritt in 2017 related to this arrangement.

Step by step solution

01

Definition of Accounts Receivables

The balance sheet account representing the money still not received from the customer to whom sales were made on credit is known as accounts receivables.

02

Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
20 June 2017	Cash	$9,040
	Accounts receivables	$36,160
	Unearned sales revenue (dryer)		$41,091
	Unearned service revenue (Installation)		$2,935
	Unearned service revenue (maintenance)		$1,174
1 Oct 2017	Cash	$36,160
	Accounts receivables		$36,160
1 Oct 2017	Unearned service revenue (Installation)	$2,935
	Unearned sales revenue (Dryer)	$41,091
	Sales revenue		$41,091
	Service revenue		$2,935
1 Oct 2017	Cost of goods sold	$33,000
	Inventory (3 x $11000)		$33,000
31 Dec 2017	Unearned service revenue	$98
	Service revenue $\left(\$1174\times \frac{3}{36}\right)$		$98
		$158,484	$158,484

Working note:

Total Standalone selling price:

Particular	Amount $
Dryer (3 x $14000)	$42,000
Installation (3 x $1000)	$3,000
Maintenance plan	$1,200
Total estimated standalone selling price	$46,200

Allocation of contract price:

Particular	Standalone selling price	/	Total estimated standalone selling price	X	Contract price	=	Revenue
Dryer	$42,000	/	$46,200	X	$45,200	=	$41,091
Installation	$3,000	/	$46,200	X	$45,200	=	$2,935
Maintenance plan	$1,200	/	$46,200	X	$45,200	=	$1,174
Total							$45,200

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