Chapter 17, Problem 15E

On January 1, 2019, Piper Company entered into an agreement with Save-Mart to sell its most popular product, the gadget. The contract stipulates that the price per unit will decrease as Save-Mart purchases higher volumes of the gadget, as follows:

The contract states that Save-Mart pays Piper the unit price based on the current sales volume. Once a volume threshold is reached, the price is retroactively reduced to the applicable price per unit. Based on its past experience with similar contracts, Piper believes that the total sales volume for the year will be 1,800 units and uses the most likely amount approach to estimate variable consideration. In addition, Piper concludes it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty surrounding the variable consideration is resolved.

Required:

1. Determine the transaction price per unit that Piper should use to record revenue.

2. Assume that Save-Mart purchases 800 units in the first quarter of 2019 and 900 units in the second quarter of 2019. Prepare Piper’s journal entries to record the sales in the first and second quarters.

3. Given the higher than expected sales volume in the first half of the year, Piper increases its estimate of the sales volume to 2,800 units. Prepare the journal entry to record this change in estimate.

To determine

Ascertain the transaction price per unit that is used to record the revenue.

Explanation of Solution

Transaction price:

Transaction price is the amount of consideration that is estimated by the company to be authorized in exchange, for delivering the promised goods and services to the customer. Transaction price is examined by the seller by analyzing the terms of the contract and the normally conducts of the business.

$45 is the transaction price per unit since, sales of 1,800 units is expected and the price per unit with sales volume of 1,001-2,000 units is $45.

To determine

Journalize entries to record the sakes made in the first and second quarters.

Explanation of Solution

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entry for the first quarter:

Date	Account title and explanation	Debit ($)	Credit ($)
	Cash  (1)	40,000
	Sales revenue (2)		36,000
	Return liability (3)		4,000
	(To record the recognition of liability)

Table (1)

• Cash is an asset and it is increased. Therefore, debit cash account by $40,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $36,000.
• Return liability is increased. Therefore, credit returns liability account by $4,000.

Prepare journal entry for the second quarter:

Date	Account title and explanation	Debit ($)	Credit ($)
	Cash (Balancing  figure)	36,500
	Refund liability (3)	4,000
	Sales revenue (4)		40,500
	(To record the payment of refund)

Table (2)

• Cash is an asset and it is increased. Therefore, debit cash account by $36,500.
• Refund liability is decreased. Therefore, debit returns liability account by $4,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $40,500.

Working notes:

(1)Calculate the amount of cash during the first quarter:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{units}\text{purchased}\text{×}\text{Price}\text{per}\text{unit}\\ \text{=}\text{800}\text{units}\text{×}\text{\$50}\\ \text{=\$40,000}\end{array}$

Note: $50 is the price per unit for the sales of 0 to 1,000 units.

(2)Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\left(\begin{array}{l}\text{Number}\text{of}\text{units}\text{purchased}\\ \text{during}\text{first}\text{quarter}\text{×}\text{price}\text{per}\text{unit}\end{array}\right)\\ \text{=}\text{800}\text{units}\text{×}\text{\$45}\\ \text{=\$36,000}\end{array}$

Note: $45 is the price per unit for the sales of 1,001 to 2,000 units.

(3)Calculate the amount of refund liability:

$\begin{array}{c}\text{Refund}\text{liability}\text{=}\left(\begin{array}{l}\text{Number}\text{of}\text{units}\text{purchased}\\ \text{during}\text{first}\text{quarter}\text{×}\text{Price}\text{per}\text{unit}\end{array}\right)\\ \text{=}\text{800}\text{units}\text{×}\text{\$5}\\ \text{=\$4,000}\end{array}$

Note: $5 is the difference between $\$50-\$45$.

(4)Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{units}\text{purchased}\text{×}\text{price}\text{per}\text{unit}\\ \text{=}9\text{00}\text{units}\text{×}\text{\$45}\\ \text{=\$40,500}\end{array}$

To determine

Journalize entries to record the change in estimate.

Explanation of Solution

Prepare journal entry:

Date	Account title and explanation	Debit ($)	Credit ($)
	Sales revenue (5)	8,500
	Refund liability		8,500
	( To record the refund liability)

Table (3)

• Sales revenue is a component of stockholders’ equity and it is decreased. Therefore, debit sales revenue account by $8,500.
• Refund liability is increased. Therefore, credit returns liability account by $8,500.

Working note:

(5)Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\left[\left(\begin{array}{l}\text{Number}\text{of}\text{units}\text{purchased}\text{during}\text{first}\text{quarter}\text{+}\\ \text{Number}\text{of}\text{units}\text{purchased}\text{during}\text{second}\text{quarter}\end{array}\right)\text{×}\text{price}\text{per}\text{unit}\right]\\ \text{=}\left[\left(\begin{array}{l}\text{800}\text{units}\text{+}\\ \text{900}\text{units}\end{array}\right)\text{×}\text{\$5}\right]\\ \text{=\$8,500}\end{array}$

Note: $5 is the difference between $\$45-\$40$.