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BRIEF EXERCISE 18.13 (continued)
October 11, 2019
Sales Returns and Allowances................................ 78,000
Accounts Receivable ........................................ 78,000
Returned Inventory .................................................. 62,400
Cost of Goods Sold
Accounts Receivable ............................................... 700,000
Allowance for Sales Returns and
Allowances (.15 X $700,000) ................... 105,000
Sales Revenue .................................................. 595,000
October 11, 2019
BRIEF EXERCISE 18.13 (continued)
October 31, 2019
Inventory ($84,000 − $62,400) ................................. 21,600
Estimated Inventory Returns .......................... 21,600
BRIEF EXERCISE 18.14
Kristin would recognize in its financial statements the following:
(a) Net sales of $5,800 comprised of sales, $6,000 ($20 X 300) less
sales returns and allowances of $200 ($20 X 10).
BRIEF EXERCISE 18.15
When to recognize revenue in a bill-and-hold arrangement depends on the
circumstances. Mills determines when it has satisfied its performance
obligation to transfer a product by evaluating when ShopBarb obtains
control of that product. For ShopBarb to have obtained control of a product
in a bill-and-hold arrangement, all of the following criteria should be met:
(a) The reason for the bill-and-hold arrangement must be substantive.
June 1, 2019
Accounts Receivable ............................................... 200,000
Sales Revenue .................................................. 200,000
Mills makes the following entry to record the cash received.
September 1, 2019
Cash .......................................................................... 200,000
Accounts Receivable ........................................ 200,000
BRIEF EXERCISE 18.16
Accounts Payable (ShipAway Cruise Lines) .................. 70,000
BRIEF EXERCISE 18.17
Cash .................................................................................. 18,850*
Advertising Expense ........................................................ 500
BRIEF EXERCISE 18.18
Amounts Reported in Income
Sales revenue .......................................................... $1,000,000
Warranty expense.................................................... 40,000
Amounts Reported on the Statement of Financial Position
BRIEF EXERCISE 18.18 (continued)
The company recognizes revenue related to the service type warranty over
the two-year period that extends beyond the assurance warranty period
BRIEF EXERCISE 18.19
No entry is required on May 1, 2019 because neither party has performed
on the contract. On June 15, 2019, Eric agreed to pay the full price and
therefore Mount has an unconditional right to those funds on that date.
On receiving the cash on June 15, 2019, Mount records the following entry.
June 15, 2019
Cash .......................................................................... 25,000
BRIEF EXERCISE 18.20
The initiation fee may be viewed as separate performance obligation
because it provides a renewal option at a lower price than normally
BRIEF EXERCISE 18.21
In evaluating how to account for the modification, Stengel Co. concludes
that the remaining services to be provided are distinct from the services
transferred on or before the date of the contract modification. In addition,
*BRIEF EXERCISE 18.22
Construction in Process .......................................... 1,700,000
Materials, Cash, Payables. ............................... 1,700,000
Accounts Receivable ............................................... 1,200,000
Billings on Construction in Process ............... 1,200,000
*BRIEF EXERCISE 18.23
Current Assets
Accounts receivable ......................................... $240,000
*BRIEF EXERCISE 18.24
Construction Expenses ........................................... 278,000
*BRIEF EXERCISE 18.25
April 1, 2019
Cash ......................................................................... 25,000
Notes Receivable ($75,000 – $25,000 - $8,598) ...... 41,402
July 1, 2019
Unearned Service Revenue (Training) ................... 2,000
SOLUTIONS TO EXERCISES
EXERCISE 18.1 (10–15 minutes)
(1) Kawaski is in the business of buying and selling both new and used
Jeeps and this activity should be considered part of its ordinary
(2) This statement is not correct. In the new standard, indicators that
control has passed to the customer include having (1) a present
obligation to pay, (2) physical possession, (3) legal title, (4) risks and
rewards of ownership, and (5) acceptance of the asset.
(4) This statement is not correct. For a valid contract to exist, the
collection of revenue must be probable.
(5) The distinction between revenue and gains is important because it is
useful to understand how these increases in net income occurred.
EXERCISE 18.2 (10–15 minutes)
(1) A wholly unperformed contract is not recorded until one or both of the
parties have performed. The new revenue standard uses the asset
EXERCISE 18.2 (continued)
(3) Elaina should account for this additional option. Whether the option
provides for free goods or goods at a discount, the option is a
(4) Under the new standard, the collectability criterion is designed to
prevent companies from applying the revenue model to problematic
EXERCISE 18.3 (10–15 minutes)
(a) May 1, 2019
No entry – neither party has performed on May 1, 2019.
(b) May 15, 2019
(c) May 31, 2019
Unearned Sales Revenue ......................................... 900
EXERCISE 18.4 (20–25 minutes)
(a) The journal entry to record the sale and related cost of goods sold are
as follows:
January 2, 2019
Notes Receivable ............................................ 600,000
Sales Revenue ($610,000 − $10,000) ... 600,000
(b) January 2, 2019
Notes Receivable ............................................ 610,000
Sales Revenue ...................................... 610,000
Note that the time value of money is not considered because the
contract is less than a year. Also, if payment occurs within 5 days,
under the net method, the entry would be:
EXERCISE 18.4 (continued)
If payment occurs within 5 days, under the gross method, the entry
would be
EXERCISE 18.5 (20–25 Minutes)
(a) The transaction price for this contract should be computed as follow:
Contract price $200,000
(b) The transaction price for this contract should be computed as follow:
Contract price $200,000
Expected value of the bonus 39,000
NOTE TO INSTRUCTOR: Given just two outcomes, the company could
determine the bonus component of the transaction price based on the most
likely outcome ($40,000). If reliable, use of probability outcomes is more
accurate.
EXERCISE 18.6 (20-25 minutes)
The transaction price that Real Estate Inc. should record is $3,000,000. At
this point, it appears that it will be difficult for Real Estate Inc. to argue that
EXERCISE 18.7 (15–20 minutes)
(a) Because the arrangement only has two possible outcomes (regulatory
approval is achieved or not), Blair determines the transaction price
(b) December 20, 2019
Accounts Receivable ...................................... 10,000,000
EXERCISE 18.8 (15–20 minutes)
(a) Aaron determines that the transaction price for the 100 policies is
$14,500 [($100 X 100) + ($10 X 4.5 X 100)].
(b) Aaron will recognize revenue of $3,222 ($14,500 X 12/54), because on
EXERCISE 18.9 (20–25 minutes)
(a) December 31, 2019
December 31, 2020
Unearned Rent Revenue ................................. 240,000
Rent Revenue .......................................... 240,000
EXERCISE 18.9 (continued)
(b) The marina operator should recognize that advance rentals generated
$190,400 ($152,000 + $38,400) of cash in exchange for the marina’s
promise to deliver future services. In effect, this has reduced future
EXERCISE 18.10 (25–30 minutes)
July 1, 2019
No entry – neither party has performed under the contract.
On September 1, 2019, Geraths has two performance obligations: (1) the
delivery of the windows and (2) the installation of the windows.
Windows $2,000
Installation 600
Total $2,600
Allocation
Geraths makes the following entries for delivery and installation.
September 1, 2019
EXERCISE 18.10 (continued)
Cost of Goods Sold ................................................. 1,100
Inventory .......................................................... 1,100
(Windows delivered, performance obligation for installation recorded)
October 15, 2019
Cash ......................................................................... 400
Unearned Service Revenue .................................... 554
EXERCISE 18.11 (20–25 minutes)
(a) July 1, 2019
No entry – neither party has performed under the contract.
Allocation
Windows ($2,000 ÷ $2,480) X $2,400 = $1,935
Installation ($480 ÷ $2,480) X $2,400 = 465
EXERCISE 18.11 (continued)
September 1, 2019
Cash .......................................................................... 2,000
Accounts Receivable ............................................... 400
October 15, 2019
Cash .......................................................................... 400
Unearned Service Revenue ..................................... 465
(b) If Geraths cannot estimate the costs for installation, then the residual
approach is used. In this approach, the total fair value of the contract
Geraths makes the following entries for delivery and installation.
September 1, 2019
Cash .......................................................................... 2,000
Accounts Receivable ............................................... 400
EXERCISE 18.11 (continued)
October 15, 2019
Cash ......................................................................... 400
EXERCISE 18.12 (10–15 minutes)
(a) The entry to record the sale and related cost of goods sold is as
follows.
January 2, 2019
Accounts Receivable ..................................... 410,000
(b) First Quarter
Sales revenue ................................................. £370,000
EXERCISE 18.13 (25–30 minutes)
(a) The total revenue of €1,000,000 should be allocated to the two
EXERCISE 18.13 (continued)
(b) Crankshaft makes the following entries.
June 1, 2019
Accounts Receivable ...................................... 1,000,000
Unearned Service
September 30, 2019
Unearned Service Revenue ............................ 47,619
Service Revenue (Installation) ............... 47,619
EXERCISE 18.14 (25–30 minutes)
(a) The total revenue of €1,000,000 should be allocated to the two
performance obligations based on their standalone selling prices. In
(b) Crankshaft makes the following entries.
June 1, 2019
Accounts Receivable ..................................... 1,000,000
September 30, 2019
Unearned Service Revenue ........................... 43,062
