CHAPTER 5 Revenue Recognition and Profitability Analysis 283 Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’ contract specifies that it will receive a flat fee of $50,000 and an additional $20,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that Bran will achieve the cost-savings target. Required: 1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price. 2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the transaction price. 3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements. Calculate the transaction price. Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,000 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $100 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of “excellent” by Wilderness customers. The $1,000 per day and any bonus due are paid in one lump payment shortly after the end of each month. • On July 1, based on prior experience, Rocky estimated that there is a 30% chance that it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15. • On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 80% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31. • On August 5 Rocky learned that it did not receive an average evaluation of “excellent” for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours. Rocky bases estimates of variable consideration on the most likely amount it expects to receive. Required: 1. Prepare Rocky’s July 15 journal entry to record revenue for tours given from July 1–July 15. 2. Prepare Rocky’s July 31 journal entry to record revenue for tours given from July 16–July 31. 3. Prepare Rocky’s August 5 journal entry to record any necessary adjustments to revenue and receipt of payment from Wilderness. Assume the same facts as in E5–10. Required: Complete the requirements of E5–10 assuming that Rocky bases estimates of variable consideration on the expected value it expects to receive. Furtastic manufactures imitation fur garments. On June 1, 2016, Furtastic made a sale to Willett’s Department Store under terms that require Willett to pay $150,000 to Furtastic on June 30, 2016. In a separate transaction on June 15, 2016, Furtastic purchased brand advertising services from Willett for $12,000. The fair value of those advertising services is $5,000. Furtastic expects that 3% of all sales will prove uncollectible. Required: 1. Prepare the journal entry to record Furtastic’s sale on June 1, 2016. 2. Prepare the journal entry to record Furtastic’s purchase of advertising services from Willett on June 15, 2016. Assume all of the advertising services are delivered on June 15, 2016. 3. Prepare the journal entry to record Furtastic’s receipt of $150,000 from Willett on June 30, 2016. 4. How would Furtastic’s expectation regarding uncollectible accounts affect its recognition of revenue from the sale to Willett’s Department Store on June 1, 2016? Explain briefly. (This exercise is a variation of E 5–3.) Video Planet (“VP”) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and onsite installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $1,750 and sells the remote separately for $100, and offers the entire package for $1,900. VP does not sell the installation service separately. VP is aware that other similar vendors charge $150 for the installation service. VP also estimates that it incurs approximately $100 of compensation and other costs for VP staff to provide the installation service. VP typically charges 40% above cost on similar sales. E 5–9 Variable consideration; estimation and constraint ● LO5–6 E5–10 Variable consideration— most likely amount; change in estimate ● LO5–3, LO5–6 E5–11 Variable consideration– expected value; change in estimate ● LO5–3, LO5–6 E 5–12 Consideration payable to customer; collectibility of transaction price ● LO5–2, LO5–5, LO5–6 E 5–13 Approaches for estimating standalone selling prices ● LO5–6
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