BRIEF EXERCISE 18.10 (continued)
(b) Parnevik makes the following entry to record interest revenue for 2020.
December 31, 2020
Discount on Notes Receivable……………………. 55,000
BRIEF EXERCISE 18.11
January income …………………………………….…………. $ 0
BRIEF EXERCISE 18.12
Manual reduces revenue by $6,600 ($110,000 X .06) because it is probable
BRIEF EXERCISE 18.13
July 10, 2020
Accounts Receivable …………………………..……………
700,000
BRIEF EXERCISE 18.13 (continued)
October 11, 2020
Sales Returns and Allowances..…………………….…. 78,000
Accounts Receivable ………..………………………. 78,000
July 10, 2020
Accounts Receivable ………..……………………..……… 700,000
Allowance for Sales Returns and
Allowances (.15 X $700,000) ………………
105,000
Sales Revenue ($700,000 – $105,000) ………….
595,000
BRIEF EXERCISE 18.13 (continued)
October 31, 2020
Cost of Goods Sold ($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
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
BRIEF EXERCISE 18.15 (continued)
(d) Mills cannot have the ability to use the product or to direct it to
another customer.
June 1, 2020
Accounts Receivable …………………..…………………..
200,000
September 1, 2020
Cash …………………..………………………………………….. 200,000
Accounts Receivable ………..………………………. 200,000
If a significant period of time elapses before payment, the accounts
BRIEF EXERCISE 18.16
(1)
(2)
Accounts Payable (ShipAway Cruise Lines) ……...
70,000
BRIEF EXERCISE 18.17
Cash …………….………………….……………………..……………….
18,850*
Advertising Expense .…………..……………………………………
500
Cost of Goods Sold …………………………………………….…….
BRIEF EXERCISE 18.18
Amounts Reported in Income
Sales revenue …………………………………………………….. $1,000,000
Warranty Expense …………………………….……………… 40,000
Amounts Reported on the Balance Sheet
Unearned Service Revenue ………………………………. $ 12,000
Cash ($1,000,000 + $12,000) …………………….……….. 1,012,000
BRIEF EXERCISE 18.19
No entry is required on May 1, 2020 because neither party has performed
on the contract. On June 15, 2020, 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, 2020, Mount records the following entry.
June 15, 2020
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
*BRIEF EXERCISE 18.22
Construction in Process ……………….…………………..
Materials, Cash, Payables. ………………………….
1,700,000
1,700,000
1,200,000
Cash ………………………………………………………………..
*[$1,700,000 ÷ ($1,700,000 + $3,300,000)]
Accounts Receivable …………………………..……………
*BRIEF EXERCISE 18.23
Current Assets
Accounts receivable ……….……………………….…
$240,000
Inventories
*BRIEF EXERCISE 18.24
(a) Construction Expenses ($265,364 – $285,364) …..
Construction in Process ……………………..
285,364
20,000*
*BRIEF EXERCISE 18.25
April 1, 2020
Cash …………….……………………….…………………….….
25,000
Notes Receivable ($75,000 – $25,000) …………….….
50,000
Unearned Service Revenue (Training) ……………….
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. This criterion was used in previous GAAP
but often proved difficult to implement in practice. 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.
(3) This statement is not correct. This criterion was used in previous
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 an 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 GAAP, the collectability criterion is designed to prevent
companies from applying the revenue model to problematic contracts
EXERCISE 18.3 (10–15 minutes)
(a) May 1, 2020
No entry – neither party has performed on May 1, 2020.
(b) May 15, 2020
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, 2020
Notes Receivable……….…….…….…….…….……
Sales Revenue ($610,000 − $10,000)...
600,000
600,000
(b) January 2, 2020
Notes Receivable……….…….…….…….…….……
Sales Revenue………………………………..
610,000
610,000
EXERCISE 18.4 (continued)
If payment occurs within 5 days, under the gross method, the entry
would be as follows:
EXERCISE 18.5 (20-25 Minutes)
(a) The transaction price for this contract should be computed as follows:
Contract price
$200,000
Expected value of the bonus
34,000
Transaction Price
$234,000
(b) The transaction price for this contract should be computed as follow:
Contract price
$200,000
Expected value of the bonus
39,000
Transaction price
$239,000
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
(b) December 20, 2020
Accounts Receivable ……………………..……….. 10,000,000
License Revenue ……………………………… 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 $2,636 ($14,500 X 12/66) because on
EXERCISE 18.9 (20–25 minutes)
(a) December 31, 2020
Cash…………………………….…………………………. 240,000
Unearned Rent Revenue
(2021 slips – 300 X $800) ………..………….
240,000
(b) The marina operator should recognize that the 2021 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
EXERCISE 18.10 (25–30 minutes)
July 1, 2020
No entry – neither party has performed under the contract.
Allocation
Windows ($2,000 ÷ $2,600) X $2,400 = $1,846*
September 1, 2020
Cash ……………………..………………………………………..
2,000
Accounts Receivable ……………………………………….
Unearned Service Revenue ……………………….
400
554**
Sales Revenue …………………………………………
1,846*
Cash ……………………..………………………………………..
EXERCISE 18.11 (20–25 minutes)
(a) July 1, 2020
No entry – neither party has performed under the contract.
Allocation
Windows ($2,000 ÷ $2,480) X $2,400 = $1,935*
September 1, 2020
Cash ……………….……………………….………………………
2,000
October 15, 2020
Cash ……………….……………………….………………………
400
Unearned Service Revenue ………….……………………
465
EXERCISE 18.11 (continued)
(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
is $2,400. Given that the windows have a standalone fair value of
$2,000, then $400 ($2,400 – $2,000) is allocated to the installation.
Geraths makes the following entries for delivery and installation:
September 1, 2020
Cash…………………………….…………………………..
2,000
October 15, 2020
Cash…………………………….…………………………..
400
Unearned Service Revenue ….…………………….
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, 2020
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
performance obligations based on their standalone selling prices. In
EXERCISE 18.13 (continued)
(b) Crankshaft makes the following entries:
June 1, 2020
Accounts Receivable …..………………………….. 1,000,000
Unearned Service
September 30, 2020
Unearned Service Revenue ………………..…….
Service Revenue (Installation)……………
47,619
47,619