Use the following information for questions 256-257
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.
256. 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).
257. 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.
Wiggins would estimate the transaction price as follows:
258. Dr. Privacy, Inc. specializes in shredding office documents and destroying computer hard
drives for various clients in the U.S. In June 2016, 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?
259. In February 2016, 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?
260. Assuming Brunetti uses the most likely value to estimate the variable consideration,
calculate the transaction price.
261. Assuming Brunetti determines transaction price as the “expected value” of the variable
consideration, what would be the appropriate transaction price for this contract?
262. 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?
263. 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.
264. Prepare Portelli’s April 30 journal entry to account for the revenue earned in April.
265. 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.
During the month of May, Portelli earns service revenue of another $15,000. At this point,
Portelli estimates that it will most likely not be able to earn the quarterly bonus, based on the
trend in the number of customer complaints. Thus, Portelli must reduce its bonus receivable
recorded in April to zero and record the offsetting adjustment in revenue.
266. 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.
267. Prepare Romano’s April 30 journal entry to account for the revenue earned in April.
Answer:
268. 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.
269. 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.
270. Prepare Veras’ January 31 journal entry to account for the revenue earned from January 1
– January 31.
Answer:
271. 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.
272. 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 the following for questions 273-275:
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.
273. Prepare Terra’s January journal entry to account for the revenue earned from January 1 –
January 31.
274. 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.
275. 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.
276. 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.
277. Typhoon Sons & Co. manufactures various types of golf clubs to third party vendors. On
April 1, 2016, Typhoon delivers a large quantity of golf clubs to Resona Country Club. Under
the sales agreement, Resona is obligated to pay Typhoon $200,000 within six months. On
May 1, Typhoon purchases for cash the right to advertise its products during Resona’s annual
golf tournament event for $3,000. Resona normally charges $2,500 for such services. On
August 15, Resona pays Typhoon all amounts owed.
Required: Prepare the journal entries Typhoon should record to account for the transaction on
April 1, May 1 and August 15. Indicate the amount of revenue that Typhoon should recognize on
its sale of golf clubs to Resona.
278. AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens
and food service providers. One of its key customers is Home Kitchen & Co., which provides
cafeteria solutions for corporations and universities. On January 1, 2016, AgriFoods obtained
a one-year contract to supply a pre-specified amount of vegetables to Home Kitchen, and
received $600,000 in cash. Then, on March 15, AgriFoods hired Home to run one of its
employee cafeterias for a period of six months, from April to September, and paid $70,000 in
cash. For similar arrangements, Home usually charged $50,000.
Required: (a) Prepare the journal entries AgriFoods would record on January 1, 2016 and
January 31, 2016 with respect to the sales contract. Assume revenue is accrued on a monthly
basis. (b) Prepare the journal entry to account for AgriFoods’ purchase of Home’s services.
Answer:
Use the following to answer questions 279-281
Beaumont Company enters into a contract to provide a high quality diving-certification
preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons
to get ready for diving certifications. The entire package sells for $2,500.
279. Other competing sellers in the same region charge an average of $250 for a set of goggles
and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5%
discount compared to other shops, since it is a bit farther away from the ocean. Required:
What would be Beaumont’s stand-alone selling price of the goggles and the lessons, based on
adjusted market assessment approach?
280. Typically, Beaumont incurs $375 on compensation and other costs to provide the private
lessons, and earns an average of 40% profit over cost on service offerings. Required:
Assuming that the diving equipment and the certification lessons are separate performance
obligations, estimate the stand-alone selling price of the certified lessons based on the
expected cost plus margin approach.
281. Typically, if Beaumont were to sell the equipment only, it would ask for $2,000.
Required: Assuming that the diving equipment and the certification lessons are separate
performance obligations, estimate the stand-alone selling price of the lessons based on the
residual approach.
282. CompuLand Center sells a full assortment of computer parts, including motherboards,
video cards, and cables, and also offers complementary computer assembly services. The
assembly service is offered by other vendors for $100 on average, and CompuLand typically
charges approximately 20% more than other vendors for similar services on a stand-alone
basis. Required: Estimate the stand-alone selling price of the assembly service using the
adjusted market assessment approach.
283. CompuValue Center sells a full assortment of computer parts, including motherboards,
video cards, and cables, and also offers complementary computer assembly services.
CompuValue estimates that it incurs $50 in labor and materials on average to complete one
assembly order, with an average of 75% profit based on cost. Required: Assuming that
computer parts and assembly service are separate performance obligations, estimate the
stand-alone selling price of the assembly service based on the expected cost plus margin
approach.
284. CompuTime Center sells a full assortment of computer parts, including motherboards,
video cards, and cables. It also offers complementary computer assembly services. A
customer places an order for an advanced workstation, and CompuTime asks for $3,500. If
CompuTime were to sell only the parts in an advanced workstation, with no assembly, the
price would be $3,300.
Required: Assuming that computer parts and assembly service are separate performance
obligations, estimate the stand-alone selling price of the assembly service based on the residual
approach.
Answer:
285. Bria Furniture sells bed frames and mattresses. One of its products is a premium
therapeutic bed set produced by OmniSleep, which comes with a mattress and a bed frame.
Bria offers a package consisting of the mattress, the frame, and on-site installation by its staff.
All of these components can be sold separately, as often done by other vendors, so Bria
concludes that these are separate performance obligations. Bria sells the OmniSleep package
for $3,000. The mattress and the frame are sold separately for $2,000 and $900, respectively.
Other vendors in the same area typically charge $200 for on-site installation. Bria does not
sell on-site installation separately. On average, the prices charged by Bria are 10% higher
than those of its competitors. Bria estimates that it incurs about $100 of compensation and
other costs to provide the installation service. The profit margin over cost is estimated to be
approximately 35%.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted
market assessment approach, (b) the expected cost plus margin approach, and (3) the residual
approach.
286. Mahogany Billiards sells upscale pool tables and related supplies. It sells a premium
package consisting of a pool table imported from Europe, a full set of cues and balls, and on–
site installation by its staff. Mahogany determines that each of these components is a
performance obligation. Mahogany sells the pool table separately for $3,000 and the set of
cues and balls for $1,000. The entire package is sold at $4,500. Mahogany does not offer on–
site installation separately, as part of company policy. It also estimates that it incurs about
$350 of compensation and other costs per each installation. Other competing vendors sell on–
site installation separately for $450, on average. Mahogany typically earns a profit margin of
40% over cost, and its prices are generally 5% lower than those charged by competitors.
Required: Estimate the stand-alone selling price of the installation service using (a) the adjusted
market assessment approach, (b) the expected cost plus margin approach, and (3) the residual
approach.