Chapter 18: Question 12Q (page 1031)

What is the transaction price? What additional factors related to the transaction price must be considered in determining the transaction price?

Short Answer

Expert verified

It is the amount that a company receives for the exchange of products or services.

Step by step solution

01

Definition of Selling Price

The term sales price refers to the amount for which a company is willing to provide goods and services to its customers. Some percentage of profit should be added to it.

02

Transaction price and factors considered in determining the transaction price

The transaction price is the amount of money a corporation anticipates receiving from a client in exchange for the transfer of products and services. Because the client agrees to pay a specific sum to the corporation over a short period, the transaction price in a contract is frequently easy to get. Companies must examine the following aspects in other contracts. Variable consideration, time worth of money, noncash consideration, and consideration paid or due to the customer are all examples of consideration.

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Most popular questions from this chapter

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

Refer to the information in Question 14. Assume that Allee has limited experience with a construction project on the same scale as the ten speedboats. How does this affect the accounting for the variable consideration?

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.

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54.

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

(c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

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

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