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Chapter 18: Q8Q. (page 1031)

On October 10, 2017, Executor Co. entered into a contract with Belisle Inc. to transfer Executor’s specialty products (sales value of \(10,000, cost of \)6,500) on December 15, 2017. Belisle agrees to make a payment of $5,000 upon delivery and signs a promissory note to pay the remaining balance on January 15, 2018. What entries does Executor make in 2017 on this contract? Ignore time value of money considerations

Short Answer

Expert verified

The total of both debit and credit sides is $16,500.

Step by step solution

01

Definition of Journal Entry

Journal is a book of accounts in which a company records entries of business transactions. It consists of 4 columns. The first column contains the date, the second column contains the account names, the third column contains the debit amount, and the fourth contains thecredit amount.

02

Journal entry on 15 December 2017

No entry will be recorded on 10 October 2017 as both the parties did not perform the contract.

Revenue will be recognized on 15 December 2017 as the executor delivered the product on 15 December 2017, which means it performed the obligation. Therefore, a journal entry will be:

Date

Particulars

Debit ($)

Credit ($)

October 10, 2017

No Entry

December 15, 2017

Notes Receivable a/c

5,000

Cash a/c

5,000

Sales Revenue a/c

10,000

December 15, 2017

Cost of Goods Sold a/c

6,500

Inventory a/c

6,500

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Most popular questions from this chapter

Allee Corp evaluates a revenue arrangement to determine proper revenue recognition. The contract is for the construction of 10 speedboats for a contract price of \(400,000. The customer needs the boats in its showrooms by February 1, 2018, for the boat purchase season; the customer provides a bonus payment of \)21,000 if all ships are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week that the boats are delivered after the deadline until no compensation is paid if the ships are provided after February 15, 2018. Allee frequently includes such bonus terms in its contracts and thus has good historical data for estimating the probabilities of completion at different dates. It calculates an equal likelihood (25%) for each delivery outcome. What approach should Allee use to determine the transaction price for this contract? Explain.

Organic Growth Company is presently testing a number of new agricultural seeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return to these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these seeds on account for \(1,500,000 (cost \)750,000) on January 2, 2017. Customers are required to pay the full amount due by March 15, 2017.

Instructions

(a) Prepare the journal entry for Organic Growth at January 2, 2017.

(b) Assume that one customer returns the seeds on March 1, 2017, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased \(100,000 of seeds from Organic Growth.

(c) Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth’s financial results for the above transactions on March 31, 2017, assuming remaining expected returns of \)200,000.

Archer Construction Company began work on a \(420,000 construction contract in 2017. During 2017, Archer incurred costs of \)278,000, billed its customer for \(215,000, and collected \)175,000. At December 31, 2017, the estimated additional costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the completed-contract method.

Describe the conditions when contract assets and liabilities are recognized and presented in financial statements.

(Determine Transaction Price) Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of \(100 on January 2, 2017. In addition, Aaron will receive an additional commission of \)10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Instructions

(a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold.

(b) Determine the revenue that Aaron will recognize in 2017.
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