CHAPTER 5 Revenue Recognition and Profitability Analysis 291 On January 1 Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $20,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $10,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $10,000 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received. Required: Prepare the following journal entries for Revis: 1. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue. 2. Assuming total cost savings exceed target, prepare the journal entry on June 30 to record receipt of the bonus. 3. Assuming total cost savings fall short of target, prepare the journal entry on June 30 to record payment of the penalty. Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2016, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $80,000. The contract specifies that Super Rise will receive an additional $40,000 at the end of the 10 months if there is no unexpected delay, stoppage, or accident during the year. Super Rise estimates variable consideration to be the most likely amount it will receive. Required: 1. Assume that, because the building sees a constant flux of people throughout the day, Super Rise is allowed to access the elevators and related mechanical equipment only between 3am and 5am on any given day, which is insufficient to perform some of the more time-consuming repair work. As a result, Super Rise believes that unexpected delays are likely and that it will not earn the bonus. Prepare the journal entry Super Rise would record on January 1. 2. Assume instead that Super Rise knows at the inception of the contract that it will be given unlimited access to the elevators and related equipment each day, with the right to schedule repair sessions any time. When given these terms and conditions, Super Rise has never had any delays or accidents in the past. Prepare the journal entry Super Rise would record on January 31 to record one month of revenue. 3. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it does not need to spend more than two hours on any given day to operate the elevator safely because the client’s elevator is relatively new. Therefore, Super Rise believes that unexpected delays are very unlikely. Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable. Assume the same facts as P5–6. Required: 1. Assume that Super Rise anticipates it will earn the performance bonus, but is highly uncertain about its estimate given unfamiliarity with the building and uncertainty about its access to the elevators and related equipment. Prepare the journal entry Super Rise would record on January 1. 2. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it has sufficient experience with the company to make an accurate estimate of the likelihood that it will earn the performance bonus, and concludes that it is likely to earn the performance bonus. Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable. Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $60,000 at the beginning of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $20,000 or will be entitled to an additional $20,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $20,000 bonus and calculates the contract price based on the expected value of future payments to be received. After four months, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $20,000. Required: 1. Prepare the journal entry to record revenue each month for the first four months of the contract. 2. Prepare the journal entry that the Velocity Company would record after four months to recognize the change in estimate associated with the reduced likelihood that the $20,000 bonus will be received. P 5–5 Variable consideration ● LO5–3, LO5–6 P 5–6 Variable consideration; change of estimate ● LO5–3, LO5–6 P 5–7 Variable consideration; constraint and change of estimate ● LO5–3, LO5–6 P 5–8 Variable transaction price ● LO5–3, LO5–6 ✮
Spiceland_Inter_Accounting8e_Ch05
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