242) DGA Associates, Inc. sells computer workstations designed for architects. In 2018, it sold
120 workstations for $360,000. For each workstation sold, DGA distributed a 40% discount
coupon for any additional future purchases made in the next 12 months. Based on historical
experience, DGA expects that approximately 30% of the coupons will be utilized, and the goods
purchased with the coupons would normally sell for $350.
Required:
(a) How many performance obligations are in a contract to purchase a computer workstation?
Explain the reasons for your answer.
(b) Prepare a journal entry to record revenue for the sale of 120 computer workstations, assuming
that DGA uses the residual method to estimate the stand-alone selling price of the workstations
sold without the discount coupon.
122
243) On February 12, 2018, Mohawk Home and Garden enters into contract with a local
business to provide weekly grass-cutting services between May and September of that year, and
receives $2,000 in advance. As part of a local business promotion, Mohawk offers a 50%
discount on any barbecue grill with a list price in excess of $200. In the past, Mohawk charged
the same amount ($2,000) for the same weekly grass-cutting service, but without the grill
discount coupon. Based on historical experience with other clients, Mohawk estimates that about
40% of the coupons will be redeemed, purchasing grills with an average total list price of $400.
Required:
(a) How many performance obligations are in this contract? Explain the reasons for your answer.
(b) Prepare the journal entry to account for the transaction as of February 12, 2018, clearly
identifying the revenue or deferred revenue associated with each performance obligation.
244) Mammoth Publishing, Inc. owns a weekly magazine called “Nova Health,” and sells annual
subscriptions for $96. Customers prepay their subscription fee and receive 52 issues starting in
the following month. The company also offers new subscribers a 25% discount coupon on its
other weekly magazine called “Fishing & Camping,” which has a list price of $84 for an annual
subscription. Mammoth estimates that approximately 10% of the discount coupons will be
redeemed.
Required:
(a) How many performance obligations are in a single subscription contract? Explain the reasons
for your answer.
(b) Prepare the journal entry to account for one new subscription of “Nova Health,” clearly
identifying the revenue or deferred revenue associated with each performance obligation.
Use this information to answer the following questions:
On July 1, Wiggins Associates enters into a contract to provide consulting services to
Pennsylvania University (PU). The contract is anticipated to last four months and is intended to
achieve significant cost savings at the university. The contract stipulates that PU will pay
Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU
will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75%
chance that cost savings will reach the target.
245) Assume that Wiggins estimates uncertain consideration as the most likely amount.
Required:
Do the following for Wiggins:
a. Prepare the journal entry on July 31 to record the first month of revenue under the contract.
b. Assuming total cost savings exceed the target, prepare the journal entry, if any, on October
31 to record receipt of the $20,000 bonus (ignore the normal October payment of $25,000).
c. Assuming total cost savings do not reach the target, prepare the journal entry, if any, on
October 31 to record failure to receive the $20,000 bonus (ignore the normal October payment of
$25,000).
246) Assume that Wiggins estimates variable consideration as the expected value.
Required:
Prepare the journal entry on July 31 to record the first month of revenue under the contract.
247) Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard
drives for various clients in the U.S. In June 2018, it enters into a contract with the U.S.
government to properly discard computer hard drives. The contract specifies a fixed fee of
$50,000 for the first 25,000 hard drives, and an additional $5,000 for each incremental 10,000
drives. The company estimates a 65% chance of handling 25,000 drives or fewer, 30% chance of
handling more than 25,000 drives but fewer than 35,000 drives, and 5% chance of handling more
than 35,000 drives but fewer than 45,000 drives.
Required:
Assuming that the company determines transaction price as the expected value of the
consideration, what is Dr. Privacy’s estimate of the transaction price for this contract?
248) In February 2018, Omnibus Interior Corporation enters into a contract with Pike Realty to
remodel a 6-unit luxury condominium in New York City. Under the contract, the company is
entitled to receive a fixed fee of $1 million, and an additional performance bonus of $500,000 if
the property is sold during the same year.
Required:
Given a strong demand for housing, Omnibus estimates that the property would most likely be
sold within the same year, and bases estimates of variable consideration on the most likely
estimate. On what transaction price should Omnibus base revenue recognition?
Use this information to answer the following questions:
Brunetti Co. designed and installed customized signs for Di Antonio CPA, Inc. Brunetti’s
contract specifies that it will receive a flat fee of $15,000 for providing the customized signs, and
an additional $1,000 if 30% of Di Antonio’s new customers indicate they first learned of Di
Antonio because of the signs. Based on historical experience, Brunetti estimates that there is a
90% chance it will achieve the threshold to receive a bonus.
249) Assuming Brunetti uses the most likely value to estimate the variable consideration,
calculate the transaction price.
250) Assuming Brunetti determines transaction price as the “expected value” of the variable
consideration, what would be the appropriate transaction price for this contract?
251) Assume Brunetti uses the “expected value” approach, but is very uncertain of that estimate
due to a lack of experience with similar arrangements. What would be the appropriate transaction
price?
252) Omni-Resistor, Inc. specializes in waterproofing homes, office buildings and other
structures. Recently it completed a waterproofing renovation for a building at a local university.
The contract specifies that Omni-Resistor will receive a flat lump sum of $100,000 for the
renovation, and an additional $2,500 if there is no roof leaking through the roof within the first
year after the renovation. The seller estimates that there is an 85% chance that no leakage will
occur within the first year.
Required:
(a) Assuming Omni-Resistor uses the most likely value to estimate the variable consideration,
calculate the transaction price.
(b) Assuming Omni-Resistor determines transaction price as the “expected value” of the variable
consideration, calculate the transaction price.
(c) Assume Omni-Resistor uses the “expected value” approach, but is very uncertain of that
estimate due to a lack of experience with similar renovations. Calculate the transaction price.
Use this information to answer the following questions:
Portelli Services provides room-cleaning arrangements for hotels in Pennsylvania. On April 1,
Silvia Hotels & Resorts signed an agreement to outsource its room-cleaning functions to Portelli.
The contract specifies the service fee to be $15,000 per month, and all payments are to be made
shortly after the end of each quarter. It also specifies that Portelli will receive an additional
quarterly bonus of $3,000 if, during that quarter, Silvia receives no more than five complaints
from customers about room cleanliness.
• On April 1, based on historical experience, Portelli estimated that there is a 75% chance that it
will earn the quarterly bonus.
• On May 5, Portelli learned that, during March, there were two complaints from customers
related to room cleanliness. Based on this new information, Portelli revised its estimate
downward to 40% that it would earn the quarterly bonus.
• On June 30, Silvia notified Portelli that, for the quarter ended, there were four complaints
associated with room cleanliness, so Portelli would receive the bonus. Two days later, Portelli
received all payments due for all services rendered in the second quarter, including the bonus.
Portelli bases estimates of variable consideration on the most likely amount it expects to receive.
253) Prepare Portelli’s April 30 journal entry to account for the revenue earned in April.
254) Prepare Portelli’s May 31 journal entry to record the revenue earned in May, as well as any
appropriate adjustments to the revenue earned in April.
255) Prepare Portelli’s June 30 and July 2 journal entries to record additional service revenue
earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.
Use this information to answer the following questions:
Romano Services provides room cleaning arrangements for hotels in Ohio. On April 1, Silvia
Hotels & Resorts signed an agreement to outsource its room cleaning functions to Romano. The
contract specifies the service fee to be $15,000 per month, and all payments are to be made
shortly after the end of each quarter. It also specifies that Romano will receive an additional
quarterly bonus of $3,000, if during that quarter, Silvia receives no more than five complaints
from customers about room cleanliness.
• On April 1, based on historical experience, Romano estimated that there is a 75% chance that
it will earn the quarterly bonus.
• On May 5, Romano learned that, during March, there were two complaints from customers
related to room cleanliness. Based on this new information, Romano revised its estimate
downward to 40% that it would earn the quarterly bonus.
• On June 30, Silvia notified Romano that, for the quarter ended, there were four complaints
associated with room cleanliness, so Romano would receive the bonus. Two days later, Romano
received all payments due for all services rendered in the second quarter, including the bonus.
Romano bases estimates of variable consideration on the expected value of the consideration it
expects to receive.
256) Prepare Romano’s April 30 journal entry to account for the revenue earned in April.
257) Prepare Romano’s May 30 journal entry to record the revenue earned in May, as well as any
appropriate adjustments to the revenue earned in April.
258) Prepare Romano’s June 30 and July 2 journal entries to record additional service revenue
earned, as well as any necessary adjustments to revenue and receipt of payment from Silvia.
Use this information to answer the following questions:
Veras Bus Transportation provides on-campus bus services for universities. On January 1, it
enters into a one-year contract with Moose University to operate five bus lines traveling
throughout the campus. Under the contract, Veras will be paid $100,000 on the last day of each
month. In addition, Veras will receive an additional $120,000 at the end of each six-month
period, provided it remains free of accidents.
• On January 1, based on historical experience, Veras estimated that there is a 75% chance that
it will remain free of accidents for the entire year.
• On March 20, three of the most senior drivers at Veras abruptly left. As a result, Veras had to
hire inexperienced drivers to fill the vacant positions. Consequently, Veras revised its estimate to
a 30% chance that it would earn the semiannual bonus.
• On June 30, Moose confirmed that there was no accident between January and June, so Veras
would be entitled to the semiannual bonus.
Veras bases estimates of variable consideration on the most likely amount it expects to receive.
259) Prepare Veras’ January 31 journal entry to account for the revenue earned from January 1
— January 31.
260) Prepare Veras’ March 31 journal entry to record the revenue earned from March 1 — March
31, as well as any appropriate adjustments to the revenue already presumed recorded as earned
from January 1 — February 28.
261) Prepare Veras’ June 30 journal entry to account for the revenue earned from June 1 – June
30, as well as any necessary adjustments to revenue presumed to have been previously recorded.
Use this information to answer the following questions:
Terra Bus Transportation provides on-campus bus services for universities. On January 1, it
enters into a one-year contract with Moose University to operate five bus lines traveling
throughout the campus. Under the contract, Terra will be paid $100,000 on the last day of each
month. In addition, Terra will receive an additional $120,000 at the end of each six-month
period, provided it remains free of accidents.
• On January 1, based on historical experience, Terra estimated that there is a 75% chance that
it will remain free of accidents for the entire year.
• On March 20, three of the most senior drivers at Terra abruptly left. As a result, Terra had to
hire inexperienced drivers to fill the vacant positions. Consequently, Terra revised its estimate to
a 30% chance that it would earn the semiannual bonus.
• On June 30, Moose confirmed that there was no accident between January and June, so Terra
would be entitled to the semiannual bonus.
Terra bases estimates of variable consideration on the expected value it expects to receive.
262) Prepare Terra’s January journal entry to account for the revenue earned from January 1 –
January 31.
263) Prepare Terra’s March 31 journal entry to record the revenue earned from March 1 – March
31, as well as any appropriate adjustments to the revenue presumed already recorded as earned
from January 1 – February 28.
264) Prepare Terra’s June 30 journal entry to account for the revenue earned from June 1 – June
30, as well as any necessary adjustments to revenue.
265) Assume that GM signs a contract to deliver 10 buses to the Tompkins Consolidated Area
Transit (TCAT), which provides transit service throughout Tompkins County, for $4 million.
Under the contract, TCAT makes a cash payment of $4 million to GM, and the 10 buses are
shipped immediately from GM’s existing inventory. At the same time, GM obtains the right to
advertise its products on all of TCAT buses for six months, and makes a cash payment of
$20,000 to GM for the advertising service. The fair value of the advertising service is $18,000.
Required:
Prepare the journal entries GM should record to account for the sale of the buses and the
purchase of the advertisements. Indicate the amount of revenue GM should recognize for its sale
of buses to TCAT.