18 Revenue Recognition BRIEF EXERCISES 18
BRIEF EXERCISES
BE18-1 (L01) Leno Computers manufactures tablet computers for sale to retailers such as Fallon Electronics. Recently, Leno sold and delivered 200 tablet computers to Fallon for $20,000 on January 5, 2017. Fallon has agreed to pay for the 200 tablet computers within 30 days. Fallon has a good credit rating and should have no difficulty in making payment to Leno. (a) Explain whether a valid contract exists between Leno Computers and Fallon Electronics. (b) Assuming that Leno Computers has not yet delivered the tablet computers to Fallon Electronics, what might cause a valid contract not to exist between Leno and Fallon?
BE18-2 (L01) On May 10, 2017, Cosmo Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2017. Greig agrees to pay the full contract price of $2,000 on July 15, 2017. The cost of the goods is $1,300. Cosmo delivers the product to Greig on June 15, 2017, and receives payment on July 15, 2017. Prepare the journal entries for Cosmo related to this contract. Either party may terminate the contract without compensation until one of the parties performs.
BE18-3 (L02) Hillside Company enters into a contract with Sanchez Inc. to provide a software license and 3 years of customer support. The customer-support services require specialized knowledge that only Hillside Company’s employees can perform. How many performance obligations are in the contract?
BE18-4 (L02) Destin Company signs a contract to manufacture a new 3D printer for $80,000. The contract includes installation which costs $4,000 and a maintenance agreement over the life of the printer at a cost of $10,000. The printer cannot be operated without the installation. Destin Company as well as other companies could provide the installation and maintenance agreement. What are Destin Company’s performance obligations in this contract?
BE18-5 (L02) Ismail Construction enters into a contract to design and build a hospital. Ismail is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing. Does Ismail have a single performance obligation to the customer in this revenue arrangement? Explain.
BE18-6 (L02) Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $50,000 each week that completion is delayed.
Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:…
Determine the transaction price for this contract.
BE18-7 (L02) Referring to the revenue arrangement in BE18-6, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2018, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2018), and (b) Nair has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.
BE18-8 (L02) Presented below are three revenue recognition situations.
(a) Groupo sells goods to MTN for $1,000,000, payment due at delivery.
(b) Groupo sells goods on account to Grifols for $800,000, payment due in 30 days.
(c) Groupo sells goods to Magnus for $500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is $464,000.
Indicate the transaction price for each of these situations and when revenue will be recognized.
BE18-9 (L02) On January 2, 2017, Adani Inc. sells goods to Geo Company in exchange for a zero-interest-bearing note with face value of $11,000, with payment due in 12 months. The fair value of the goods at the date of sale is $10,000 (cost $6,000). Prepare the journal entry to record this transaction on January 2, 2017. How much total revenue should be recognized in 2017?
BE18-10 (L02) On March 1, 2017, Parnevik Company sold goods to Goosen Inc. for $660,000 in exchange for a 5-year, zerointerest- bearing note in the face amount of $1,062,937 (an inputed rate of 10%). The goods have an inventory cost on Parnevik’s books of $400,000. Prepare the journal entries for Parnevik on (a) March 1, 2017, and (b) December 31, 2017.
BE18-11 (L02,3) Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells $4,000 of prepaid cards in January 2017. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is $3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April.
BE18-12 (L02,3) Manual Company sells goods to Nolan Company during 2017. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?
BE18-13 (L03) 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.
BE18-14 (L03) Kristin Company sells 300 units of its products for $20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is $12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).
BE18-15 (L03) On June 1, 2017, Mills Company sells $200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2017, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that conditions for recognizing the sale as a bill-and-hold sale have been met) for Mills on June 1 and September 1, 2017. The cost of the shelving units to Mills is $110,000.
BE18-16 (L03) Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is $70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits $65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction.
BE18-17 (L03) Jansen Corporation shipped $20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of $2,000. Gooch Company paid $500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen’s journal entry when the cash is received.
BE18-18 (L03) Talarczyk Company sold 10,000 Super-Spreaders on December 31, 2017, at a total price of $1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is $550,000. The assurance warranties extend for a 2-year period and are estimated to cost $40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for $12,000. Given this information, determine the amounts to report for the following at December 31, 2017: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash.
BE18-19 (L04) On May 1, 2017, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2017. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2017. Eric pays on June 15, 2017, and Mount delivers the product on September 30, 2017. Prepare the journal entries required for Mount in 2017.
BE18-20 (L03) Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a nonrefundable initiation fee of $100. No annual membership fee is charged in the first year. After the first year, membership can be renewed by paying an annual membership fee of $5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year?
BE18-21 (L04) Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay $100,000 at the beginning of each year (the standalone selling price of the service at contract inception is $100,000 per year). At the end of the second year, the contract is modified and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to $80,000 (the standalone selling price of the services at the beginning of the third year is $80,000 per year). Briefly describe the accounting for this contract modification.
BE18-22 (L05) Turner, Inc. began work on a $7,000,000 contract in 2017 to construct an office building. During 2017, Turner, Inc. incurred costs of $1,700,000, billed its customers for $1,200,000, and collected $960,000. At December 31, 2017, the estimated additional costs to complete the project total $3,300,000. Prepare Turner’s 2017 journal entries using the percentage-ofcompletion method.
BE18-23 (L06) Guillen, Inc. began work on a $7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process $1,715,000, Accounts Receivable $240,000, and Billings on Construction in Process $1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2017, balance sheet.
BE18-24 (L07) 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.
BE18-25 (L08) Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in four equal annual installments of $12,500 each. These installments have a present value of $41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.
