EXERCISE 18.27 (15–20 minutes)
(a) October 1, 2019
To record sales revenue, warranties, and related cost of goods sold
Cash (or Accounts Receivable) ………………………….. 3,600
(b) Celic recognizes warranty expenses associated with the assurance-
type warranty as actual warranty costs are incurred during the first 90
EXERCISE 18.28 (10–15 minutes)
(a) No entry – neither party has performed on the contract on January 1,
2019.
(b) The entries to record the sale and related cost of goods sold of the
wiring base is as follows.
February 5, 2019
EXERCISE 18.28 (continued)
(c) The entries to record the sale and related cost of goods sold of the
shelving unit is as follows.
February 25, 2019
Cash …………………………..……………………………………. 3,000
EXERCISE 18.29 (20–25 minutes)
(a) Cash …………………………..………………………….. 9,000
Sales Revenue (90 X $100) ……………….. 9,000
(b) Cash …………………………..………………………….. 1,000
Sales Revenue (10 X $100) ……………….. 1,000
(c) In this case, because the new price does not reflect a stand-alone
EXERCISE 18.29 (continued)
Under the prospective approach, Gaertner determines the transaction
price for subsequent sales ($97.86) as follows.
Consideration for products not yet delivered
under original contract ($100 X 60) $ 6,000
EXERCISE 18.30 (20–25 minutes)
(a) January 1, 2019
Cash ……………………………………………………….. 10,000
EXERCISE 18.30 (continued)
January 1, 2020
Cash …………………………..………………………….. 10,000
(b) January 1, 2021
Cash ($8,000 + $20,000) …………………………... 28,000
In this case, the modification of the contract does not result in a new
performance obligation. As a result, the remaining service revenue is
recognized evenly over the remaining four years.
(c) Given the change in services in the extended contract period, the
EXERCISE 18.30 (continued)
December 31, 2021
Unearned Service Revenue ………………………. 8,000
EXERCISE 18.31 (10–15 minutes)
(a) The €2,000 commission costs related to obtaining the contract are
recognized as an asset. The design services (€3,000), controllers
(b) Companies only capitalize costs that are direct, incremental, and
recoverable (assuming that the contract period is more than one year.
EXERCISE 18.32 (20–25 minutes)
(a) If the contract is for 1 year or less, Rex can use the practical expedient
and recognize the incremental costs of obtaining a contract as an
expense when incurred.
(b) The collectibility of the contract payments will not affect the amount of
revenue recognized. That is, the amount recognized is not adjusted for
customer credit risk. Rather, Rex should report the revenue gross and
*EXERCISE 18.33 (20–25 minutes)
(a) Gross profit recognized in:
2019
2020
2021
Contract price
$1,600,000
$1,600,000
$1,600,000
Costs:
Costs to date
$400,000
$825,000
$1,070,000
Estimated costs to
complete
600,000
1,000,000
275,000
1,100,000
0
1,070,000
Total estimated profit
500,000
530,000
to date
X 75%**
X 100%
recognized
375,000
530,000
years
*EXERCISE 18.33 (continued)
(b)
2020
Construction in Process ($825,000 – $400,000) …. 425,000
Materials, Cash, Payables ………………………… 425,000
Construction Expenses …………………………………… 425,000
Construction in Process …………………………………. 135,000
(c) Gross profit recognized in:
*EXERCISE 18.34 (10–15 minutes)
(a) Contract billings to date ………………………………….. €61,500
Less: Accounts receivable 12/31/19 ………………… 18,000
Portion of contract billings collected ……………….. €43,500
*EXERCISE 18.35 (10–15 minutes)
DOUGHERTY INC.
Computation of Gross Profit to be
Recognized on Uncompleted Contract
Year Ended December 31, 2019
Total contract price
Estimated contract cost at completion
LO: 5, Bloom: AP, Difficulty: Moderate, Time: 10–15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*EXERCISE 18.36 (15–20 minutes)
(a)
2019:
$640,000
X $2,200,000 = $880,000
$1,600,000
(b) The amount of revenue recognized in 2020 is $1,560,000 ($2,200,000 –
$640,000).
(c) Using the percentage–of-completion method, the following entries
would be made:
*EXERCISE 18.36 (continued)
Revenue from Long-Term Contracts
*EXERCISE 18.37 (15–25 minutes)
(a) (1) No gross profit to be recognized in 2019 under cost-recovery
method
(b) (1) Contract price ………………………………… $6,000,000
Costs to date ………………………………………… $1,185,800
Estimated costs to complete …………………. 4,204,200
Total ……………………………………………… $5,390,000
(2) Billings (25% X $6,000,000) …………….. $1,500,000
*EXERCISE 18.38 (20–25 minutes)
(a) May 1, 2019
Cash …………………………..……………………………………. 28,000
(b) May 1, 2019
Cash …………………………..……………………………………. 28,000
Notes Receivable ……………………………………………… 42,000
Discount on Notes Receivable
* [$42,000 – (2.48685* X $14,000)]
**Present value factor for 10%, 3-year ordinary annuity.
***($62,816 ÷ 3) X 8/12
(c) May 1, 2019
Cash …………………………..……………………………………. 28,000
Notes Receivable ……………………………………………… 34,816
*EXERCISE 18.38 (continued)
July 1, 2019
Unearned Service Revenue (Training) ………………… 1,200***
Unearned Franchise Revenue ……………………………. 60,416
September 1, 2019
Unearned Service Revenue (Training) ………………… 1,200*
LO: 8, Bloom: AP, Difficulty: Moderate, Time: 20–25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Problem Solving
*EXERCISE 18.39 (15–20 minutes)
(a) January 1, 2019
Cash …………………………………………………………………. 10,000
Notes Receivable ………………………………………………. 29,567
April 1, 2019
Unearned Franchise Revenue ……………………………. 39,567
Franchise Revenue …………………………………….. 39,567
*EXERCISE 18.39 (continued)
December 31, 2019
Discount on Notes Receivable …………………………... 3,252*
Interest Revenue ……………………………………….. 3,252
*($40,000 – $10,433) X 11%
(b) January 1, 2019
Cash …………………………..……………………………………. 10,000
Notes Receivable ……………………………………………… 40,000
December 31, 2019
Unearned Service Revenue (Training)………………… 2,700
(c) January 1, 2019
Cash …………………………..……………………………………. 10,000
Notes Receivable ……………………………………………… 40,000
Discount on Notes Receivable ……………………. 10,433
*EXERCISE 18.39 (continued)
December 31, 2019
Unearned Franchise Revenue ……………………………. 7,913**
Franchise Revenue …………………………………….. 7,913
TIME AND PURPOSE OF PROBLEMS
Problem 18.1 (Time 30–35 minutes)
Purpose—to provide the student with an opportunity to determine transaction price, allocate the
transaction price to performance obligations, and account for upfront fees.
Problem 18.2 (Time 20–25 minutes)
Purpose—to provide the student with an opportunity to determine transaction price, allocate the
Problem 18.3 (Time 30–35 minutes)
Purpose—to provide the student with an opportunity to determine transaction price, allocate the
Problem 18.4 (Time 35–40 minutes)
Purpose—to provide the student with an opportunity to determine transaction price, allocate the
Problem 18.5 (Time 35–40 minutes)
Purpose—to provide the student with an opportunity to determine transaction price, allocate the
Problem 18.6 (Time 25–30 minutes)
Problem 18.7 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of the criteria and applications utilized in the
Problem 18.8 (Time 30–35 minutes)
Purpose—to provide the student with an understanding of and an opportunity to determine transaction
price, allocate the transaction price to performance obligations, and account for time value, gift cards,
and discounts.
*Problem 18.9 (Time 30–40 minutes)
*Problem 18.10 (Time 20–25 minutes)
*Problem 18.11 (Time 40–50 minutes)
Purpose—to provide the student with a long-term construction contract problem that requires the
*Problem 18.12 (Time 35–45 minutes)
SOLUTIONS TO PROBLEMS
PROBLEM 18.1
(a) The total revenue of €50,000 (100 contracts X €500) should be allocated
to the two performance obligations based on their relative standalone
selling prices. In this case, the standalone selling price of each tablet
is €250 and the standalone selling price of the internet service is €300.
The total standalone selling price to consider is €550 (€250 + €300) for
each contract. The allocation for each contract is as follows.
January 2, 2019
Cash (€500 X 100) …………………………………………….. 50,000
December 31, 2019
Unearned Service Revenue (€27,300 ÷ 3) ……………. 9,100
Service Revenue………………………………………… 9,100
PROBLEM 18.1 (Continued)
The total revenue of €120,000 (200 contracts X $600) should be allocated to
the three performance obligations based on their relative standalone
selling prices:
Tablet €250
The allocation for a single contract is as follows.
Tablet €214 (€250 / €700) X €600
Tablet Tailors makes the following entries for 200 Tablet Bundle B.
July 1, 2019
Cash (€600 X 200) ……………………………………………… 120,000
Unearned Service Revenue (Internet) …………… 51,400*
The sale of the tablets (and gross profit) should be recognized once the
tablets are delivered on July 1, 2019.
PROBLEM 18.1 (Continued)
December 31, 2019
Unearned Service Revenue (Internet)
[(€51,400 ÷ 3) X 6/12] ……………………………………… 8,567
(c) Without reliable data with which to estimate the standalone selling
price of the internet service Tablet Tailors allocates €250 for each
contract to revenue on the tablets, with the residual amount allocated
to the Internet service. Tablet Tailors makes the following entries.
January 2, 2019
Cash (€500 X 100) …………………………………………….. 50,000
December 31, 2019
Unearned Service Revenue (€25,000 ÷ 3) ……………. 8,333
Service Revenue………………………………………… 8,333
PROBLEM 18.2
Since the services in the extended period are the same as those provided
in the original contract period, the services are not distinct; the
modification should be considered as part of the original contract.
(a)
January 2, 2021
(b)
December 31, 2021
Unearned Service Revenue ………………………………… 2,413
Service Revenue (€7,240* ÷ 3) ……………………… 2,413
PROBLEM 18.3
(a) The total revenue of $8,000 ($800 X 10) should be allocated to the two
performance obligations based on their relative standalone selling
prices. In this case, the standalone selling price of the grills is
Grill Masters makes the following entries.
April 20, 2019
Cash …………………………..……………………………………. 8,000
Unearned Service Revenue (Installation) …….. 1,412
Cost of Goods Sold ………………………………………….. 4,250
Inventory ($425 X 10) …………………………………. 4,250
(b) April 17, 2019
Cash …………………………..……………………………………. 56,000
Unearned Sales Revenue …………………………... 3,360