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Chapter 18: Question E18-3 (page 1034)

(Existence of a Contract) On May 1, 2017, Richardson Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of \(900 in advance on May 15, 2017. Kickapoo pays Richardson on May 15, 2017, and Richardson delivers the mower (with cost of \)575) on May 31, 2017.

Instructions

(a) Prepare the journal entry on May 1, 2017, for Richardson.

(b) Prepare the journal entry on May 15, 2017, for Richardson.

(c) Prepare the journal entry on May 31, 2017, for Richardson.

Short Answer

Expert verified

On May 1, 2017, there will be no entry.

Step by step solution

01

Meaning of Contract Price                

It refers to the cost of the products or services that will be provided under the contract. Contract priceaids in the determination of whether or not a contract exists. If the contract price is not contained in the written contract, the court may determine that there was no contract.

02

Journal entries for Richardson Inc.

Date

Particular

Debit ($)

Credit ($)

May 1, 2017

No entry

May 15, 2017

Cash a/c

900

Unearned sales revenue a/c

900

May 31, 2017

Unearned sales revenue a/c

900

Sales revenue a/c

900

May 31, 2017

Cost of goods sold a/c

575

Inventory a/c

575

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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

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

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Instructions

(a) Prepare the journal entries (if any) to record the sale on January 2, 2017.

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