Question

(Determine Transaction Price) Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2018. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2018. Under a new policy, if payment for 2019 season slips is made by December 31, 2018, a 5% discount is allowed. If payment for 2020 season slips is made by December 31, 2018, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).

On December 31, 2017, all 300 slips for the 2018 season were rented at full price. On December 31, 2018, 200 slips were reserved and paid for the 2019 boating season, and 60 slips were reserved and paid for the 2020 boating season.

Instructions

(a) Prepare the appropriate journal entries for December 31, 2017, and December 31, 2018.

(b) Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.

Short answer

Unearned revenue in:

2017 is $240,000

2018 is $152,000 for 2019 and $38,400 for 2020.

Step-by-step solution

Meaning of Discount Allowed and Discount Received

A discount permitted is a reduction in the price of products or services that a seller allows to a customer and represents a cost to the seller. Discount received, on the other hand, is the price reduction obtained by the buyer of products and services from the seller, and it is a source of revenue for the buyer.

Journal entries and managerial significance of accounting

a. Journal entries:

Date	Particular	Debit ($)	Credit ($)
December 31, 2017	Cash a/c	240,000
	To Unearned rent revenue a/c		240,000
December 31, 2018	Cash a/c	152,000
	To Unearned rent revenue a/c		152,000
December 31, 2018	Cash a/c	38,400
	To Unearned rent revenue a/c		38,400

Working Notes:

Taylor has 300 slips and the price of slips is $800 per slip that means,

$$\begin{gathered} \mathrm{Unearned}\mathrm{revenue}\mathrm{in}2017=\mathrm{Total}\mathrm{no}.\mathrm{of}\mathrm{slips}\times \mathrm{Price}\mathrm{per}\mathrm{slip} \\ =300\times \$800 \\ =\$240,000 \end{gathered}$$

5% discount is given on payment made in advance for 2019 season slips by December 31, 2018

$$\begin{gathered} \mathrm{Unearned}\mathrm{revenue}\mathrm{in}2018\mathrm{for}2019\mathrm{season}\mathrm{slip}=\mathrm{Slips}\mathrm{reserved}\mathrm{for}2019\times \mathrm{Price}\mathrm{paid}\times \left(1-\mathrm{Discount}\mathrm{allowed}\right) \\ =200\times \$800\times \left(1-\frac{5}{100}\right) \\ =200\times \$800\times \left(1-0·05\right) \\ =\$152,000 \end{gathered}$$

20% discount is allowed on payment for 2020 season slip by December 31, 2018

$$\begin{gathered} \mathrm{Unearned}\mathrm{revenue}\mathrm{in}2018\mathrm{for}2020\mathrm{season}\mathrm{slip}=\mathrm{Slips}\mathrm{reserved}\mathrm{for}2020\times \mathrm{Price}\mathrm{paid}\times \left(1-\mathrm{Discount}\mathrm{allowed}\right) \\ =60\times \$800\times \left(1-\frac{20}{100}\right) \\ =60\times \$800\times \left(1-0·20\right) \\ =\$38,400 \end{gathered}$$

b. Managerial significance of the accounting

Advance rentsbrought in $240,000 in 2017, $152,000 for 2019 and$38,400 for 2020 in 2018 in exchange for the marina's guarantee to provide future services. As a result, future cash flow has been lowered as boat owners' payments have been accelerated. In addition, the cost of rental services has been considerably decreased. The present financial windfall is unrelated to current revenue. Future operating costs must be partially met by this faster cash stream. The giving of these reductions is ill-advised on a present value basis unless interest rates jump and interest revenue offsets the discounts granted, or unless dock repair expenses are likely to rise dramatically.