Chapter 18: Question 7Q (page 1031)
Explain the importance of a contract in the revenue recognition process.
In the revenue recognition process the contract is important as it helps recognize the obligations and amount they are receiving as a consideration.
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What is the nature of a sale on consignment?
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.
(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.
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.
(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.
2017 2018 2019
Costs incurred to date \)400,000 \(825,000 \)1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
Instructions
(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2018.
(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.
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