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Chapter 18: Q7CA-3 (page 1048)

Question: CA18-7 (Recognition of Revenue—Bonus Points) Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants, who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta & Dubel.

The following schedule expresses Griseta & Dubel’s expectations as to the percentages of a normal month’s activity that will be attained. For this purpose, a “normal month’s activity” is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year.

Month

Actual credit sale Percent

Merchandise premium purchased percent

Credit Redemption percent

6th

30%

40%

10

12th

60

60

45

18th

80

80

70

24th

90

90

80

30th

100

100

95

Griseta & Dubel plans to adopt an annual closing date at the end of each 12 months of operation.

Instructions

Provide balance sheet accounts that should be used and indicate how each should be classified.

Short Answer

Expert verified

Answer

Balance sheet accounts include:

1. Inventory.

2. Performance obligations.

Step by step solution

01

Definition of Inventory

The balance sheet asset that reflects the goods available with the business for sale is known as inventory. It also includes the raw material and work-in-process that will get converted into finished goods.

02

Balance Sheet Account

Inventory: Inventory will report the amount of premium available with the business entity on the asset side of the balance sheet.

Performance obligation: The business entity will report performance obligation as a liability account in the balance sheet.

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Most popular questions from this chapter

(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

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

(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

(b) Prepare all necessary journal entries for 2018.

In measuring the transaction price, explain the accounting for (a) time value of money and (b) noncash consideration.
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