Chapter 18: Question 18-2P-a (page 1043)

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

Short Answer

Expert verified

Revenue is $3,600.

Step by step solution

01

Meaning of Contract Modification

A contract modificationoccurs if the contractual parties agree to modify the existing terms of a contract. Contract modification can only be legal if both parties sign the acceptance of modification.

02

Journal entries when the contract signed

Date

Particular

Debit ($)

Credit ($)

January 2, 2019

Cash a/c

3,600

Unearned service revenue a/c

3,600

Working Notes:

The services supplied during the extended time are the same as those given during the initial contract period. The adjustments will be deemed part of the original contract because they are not separate.

Unearnedrevenue=Extendedcontract×Price=40×$90=$3,600

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Most popular questions from this chapter

On May 3, 2017, Eisler Company consigned 80 freezers, costing \(500 each, to Remmers Company. The cost of shipping the freezers amounted to \)840 and was paid by Eisler Company. On December 30, 2017, a report was received from the consignee, indicating that 40 freezers had been sold for \(750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of \)200, and total installation costs of $320 on the freezers sold.

Instructions

(a) Compute the inventory value of the units unsold in the hands of the consignee.

(b) Compute the profit for the consignor for the units sold.

(c) Compute the amount of cash that will be remitted by the consignee.

How do companies recognize revenue from a performance obligation over time?

What qualitative and quantitative disclosures are required related to revenue recognition?

(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 June 3, 2017, Hunt Company sold to Ann Mount merchandise having a sales price of \(8,000 (cost \)6,000) with terms of n/60, f.o.b. shipping point. Hunt estimates that merchandise with a sales value of \(800 will be returned. An invoice totaling \)120 was received by Mount on June 8 from Olympic Transport Service for the freight cost. Upon receipt of the goods, on June 8, Mount returned to Hunt \(300 of merchandise containing flaws. Hunt estimates the returned items are expected to be resold at a profit. The freight on the returned merchandise was \)24, paid by Hunt on June 8. On July 16, the company received a check for the balance due from Mount.

Instructions

Prepare journal entries for Hunt Company to record all the events in June and July.

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