Brief Exercise 18-16
Crane 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 $67,000. Crane Inc. receives a commission of 7% of the total price. Crane Inc. therefore remits $62,310 to ShipAway.
Prepare the journal entry to record the remittance and revenue recognized by Crane Inc. on this transaction. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
Brief Exercise 18-7
Monty Corp. enters into a contract with a customer to build an apartment building for $979,400. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $144,300 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $48,100 each week that completion is delayed. Monty commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
August 1, 2018
August 8, 2018
August 15, 2018
After August 15, 2018
(a) Determine the transaction price for the contract, assuming Monty is only able to estimate whether the building can be completed by August 1, 2018, or not (Monty estimates that there is a 70% chance that the building will be completed by August 1, 2018). (If answer is 0, please enter 0. Do not leave any fields blank.)
(b) Determine the transaction price for the contract, assuming Monty has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline. (If answer is 0, please enter 0. Do not leave any fields blank.)
Brief Exercise 18-12
Flint Company sells goods to Buffalo Company during 2017. It offers Buffalo the following rebates based on total sales to Buffalo. If total sales to Buffalo are 10,100 units, it will grant a rebate of 2%. If it sells up to 19,700 units, it will grant a rebate of 5%. If it sells up to 32,800 units, it will grant a rebate of 5%. In the first quarter of the year, Flint sells 10,400 units to Buffalo at a sales price of $114,400. Flint, based on past experience, has sold over 37,900 units to Buffalo, and these sales normally take place in the third quarter of the year.
What amount of revenue should Flint report for the sale of the 10,400 units in the first quarter of the year?
Concord’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $99 on January 2, 2017. Concord will receive an additional commission of $9 each year for as long as the policyholder does not cancel the policy. After selling the policy, Concord does not have any remaining performance obligations. Based on Concord’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years after the first year before terminating their insurance policy. It has no evidence to suggest that previous policyholder behavior will change.
Determine the transaction price of the arrangement for Concord, assuming 90 policies are sold.
Determine the revenue that Concord will recognize in 2017. (Round answer to 0 decimal places, e.g. 5,125.)
Metlock Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Metlock will receive a payment of $10,900,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Metlock determines it is 75% likely that the drug will gain approval and a 25% chance of denial.
Determine the transaction price of the arrangement for Metlock Biotech.
Assuming that regulatory approval was granted on December 20, 2017, and that Metlock received the payment from Pang on January 15, 2018, prepare the journal entries for Metlock. The license meets the criteria for point-in-time revenue recognition. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
Carla Company manufactures equipment. Carla’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Carla has the following arrangement with Winkerbean Inc.
Winkerbean purchases equipment from Carla for a price of $920,000 and contracts with Carla to install the equipment. Carla charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Carla determines installation service is estimated to have a standalone selling price of $50,500. The cost of the equipment is $643,000.
Winkerbean is obligated to pay Carla the $920,000 upon the delivery and installation of the equipment.
Carla delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.
Assuming Carla does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $32,500; Carla prices these services with a 20% margin relative to cost.
How should the transaction price of $920,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)
Prepare the journal entries for Carla for this revenue arrangement on June 1, 2017, assuming Carla receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
Cheyenne Ranch & Ayayai is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Cheyenne’s products. Pricing and cost information on three of Cheyenne’s most popular products are as follows.
Selling Price (Cost)
Power fence hole auger
Respond to the requirements related to the following independent revenue arrangements for Cheyenne Ranch & Ayayai.
On January 1, 2017, Cheyenne sells 50 augers to Mills Farm & Fleet for $70,000. Mills signs a 6-month note at an annual interest rate of 12%. Cheyenne allows Mills to return any auger that it cannot use within 50 days and receive a full refund. Based on prior experience, Cheyenne estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Cheyenne’s costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entry for Cheyenne on January 1, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
On August 10, 2017, Cheyenne sells 15 mini-trenchers to a farm co-op in western Minnesota. Cheyenne provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Cheyenne compared to the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met. Prepare the journal entry for Cheyenne on August 10, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Round intermediate calculations to 6 decimal places, e.g. 1.246576 and final answers to 0 decimal places, e.g. 5,125.)
Cheyenne sells three grain/hay dryers to a local farmer at a total contract price of $43,400. In addition to the dryers, Cheyenne provides installation, which has a standalone selling price of $1,000 per unit installed. The contract payment also includes a $1,100 maintenance plan for the dryers for 3 years after installation. Cheyenne signs the contract on June 20, 2017, and receives a 20% down payment from the farmer. The dryers are delivered and installed on October 1, 2017, and full payment is made to Cheyenne. Prepare the journal entries for Cheyenne in 2017 related to this arrangement. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
On April 25, 2017, Cheyenne ships 100 augers to Ayayai Depot, a farm supply dealer in Nebraska, on consignment. By June 30, 2017, Ayayai Depot has sold 50 of the consigned augers at the listed price of $1,400 per unit. Ayayai Depot notifies Cheyenne of the sales, retains a 10% commission, and remits the cash due Cheyenne. Prepare the journal entries for Cheyenne and Ayayai Depot for the consignment arrangement. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)
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