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Chapter 18: Q7CA_2 (page 1048)

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

Apply the revenue recognition factors to the Griseta&Dubel Inc. revenue arrangement.

Short Answer

Expert verified

The business entity will recognize the revenue when theperformance obligations are satisfied and the credits from the customers are redeemed.

Step by step solution

01

Definition of Credit Sales

The sales for which payment will be received in the future period are known as credit sales. These sales are generally reported as an asset.

02

Application of Revenue Recognition

The business entity will recognize revenue on completion/satisfaction of the performance and collecting cash from creditors. Here, the performance obligation of the business entity is to deliver premiums. Revenue will be recognized when the business entity makes the bonus points sales. Historical data relating to bonus points will be considered to recognize revenue from bonus points.

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Most popular questions from this chapter

When does a company satisfy a performance obligation? Identify the indicators of satisfaction of a performance obligation.

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

(b) Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2017, and December 31, 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.

(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.

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.
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