Intermediate Accounting
Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
Question
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Chapter 5, Problem 5.8P

Requirement – 1

To determine

Performance obligation:

Performance obligation is the promise made by the seller to supply the goods and service to the customer on or before the contract.

Variable consideration:

Variable consideration refers to the uncertain transaction price that depends upon the outcome of future events.

Contract:

Contract is a written document that creates legal enforcement for buying and selling the property. It is committed by the parties to performing their obligation and enforcing their rights.

Deferred revenues:

Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. For the portion of rendered services or delivered goods, revenues would be recognized by way of passing an adjusting entry. Unearned revenue is also known as deferred revenues, because at the receiving of payment in advance, revenues are not recognized but deferred until they are earned.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare: The journal entry to record revenue for the first four months of the contract.

Requirement – 1

Expert Solution
Check Mark

Answer to Problem 5.8P

Journal entry for revenue is as follows:

Date Account Title and Explanation Post Ref. Debit Credit
  Cash   $60,000  
  Bonus receivable   $1,500  
       Service revenue (Refer to equation (4))     $61,500
  (To record service performed)      

Table (1)

Explanation of Solution

  • Cash is an asset, and it increases the value of asset by $60,000, hence debit the cash for $60,000.
  • Bonus receivable is an asset, and it increases the value of asset by $1,500, hence debit the bonus receivable for $1,500.
  • Service revenue increases the value of stockholders’ equity by $61,500 hence credit the Service revenue for $61,500.

Working note:

1. Calculate the expected value:

Given,

Revenue is $60,000

Cost of saving is $20,000

Number of payments is 8

Expected value=((Revenue×Number of payments)+Cost of saving)=($60,000×8)+$20,000=$480,000+$20,000=$500,000 (1)

2. Calculate the expected value:

Given,

Revenue is $60,000,

Cost of saving is $20,000,

Number of payments is 8.

Expected value=((Revenue×Number of payments) Cost of saving)=($60,000×8)$20,000=$480,000$20,000=$460,000 (2)

3. Calculate the expected contract price:

Given,

Revenue is $60,000,

Cost of saving is $20,000,

Number of payments is 8.

Expected value Probability Expected consideration
$500,000 (Refer to equation (1)) 80% $400,000 ($110,000×80%)
$460,000(Refer to equation (2)) 20% $92,000 ($110,000×20%)
Expected contract price $492,000

Table (2)

(3)

4. Calculate the value of service revenue:

Given,

Calculated expected contract price is $492,000 (3)

Number of payments is 8.

Service revenue=(Expected contract price Number of payments)=$492,0008=$61,500 (4)

Conclusion

Therefore, the journal entry for service revenue is recorded.

Requirement – 2

To determine

To prepare: The journal entry for recognized bonus of Company V.

Requirement – 2

Expert Solution
Check Mark

Answer to Problem 5.8P

Journal entry for recognized bonus is as follows:

Date Account Title and Explanation Post Ref. Debit Credit
  Service revenue   $4,000  
          Bonus receivable (Refer to equation (6))     $4,000
  (To record offsetting adjustment in revenue)      

Table (3)

Explanation of Solution

  • Service revenue increases the value of stockholders’ equity by $28,000 hence credit the Service revenue for $28,000.
  • Bonus receivable is an asset, and it increases the value of asset by $20,000, hence debit the bonus receivable for $20,000.

Working note:

1. Calculate the expected contract price:

Given,

Revenue is $60,000,

Cost of saving is $20,000,

Number of payments is 8.

Expected value Probability Expected consideration
$500,000  (1) 60% $300,000 ($110,000×80%)
$460,000 (2) 40% $184,000 ($110,000×20%)
Expected contract price $484,000

Table (4)

(5)

2. Calculate the value of bonus receivable:

Given,

Calculated expected contract price is $484,000 (5)

Number of payments is 8.

Revenue is $60,000

Bonus receivable =(Expected contract price(Revenue×Number of payments))=$484,000($60,000×8)=$484,000$480,000=$4,000 (6)

Conclusion

Therefore, the journal entry for recognized bonus of Company V is recorded.

Requirement – 3

To determine

To prepare: The journal entry to record the revenue each month for the second four months of the contract.

Requirement – 3

Expert Solution
Check Mark

Answer to Problem 5.8P

Journal entry for recognized revenue is as follows:

Date Account Title and Explanation Post Ref. Debit Credit
  Accounts receivable   $60,000  
  Bonus receivable   $500  
          Service revenue (Refer to equation (7))     $60,500
  (To record offsetting adjustment in revenue)      

Table (5)

Explanation of Solution

  • Accounts receivable is an asset, and it increases the value of asset by $60,000, hence debit the accounts receivable for $60,000.
  • Bonus receivable is an asset, and it increases the value of asset by $500, hence debit the bonus receivable for $500.
  • Service revenue increases the value of stockholders’ equity by $60,500 hence credit the Service revenue for $60,500.

Working note:

Calculate the value of service revenue:

Given,

Calculated expected contract price is $484,000 (5)

Number of payments is 8.

Service revenue=(Service revenueNumber of payments)=$484,0008=$60,500 (7)

Conclusion

Therefore, the journal entry for revenue recognized by Company V is recorded.

Requirement – 4

To determine

To prepare: The journal entry to record the bonus cash received.

Requirement – 4

Expert Solution
Check Mark

Answer to Problem 5.8P

Journal entry for bonus as follows:

Date Account Title and Explanation Post Ref. Debit Credit
  Cash   $20,000  
       Bonus receivable     $4,000
       Service revenue (Refer to equation (8))     $16,000
  (To record service performed)      

Table (6)

Explanation of Solution

  • Cash is an asset, and it increases the value of asset by $20,000, hence debit the cash for $20,000.
  • Bonus receivable is an asset, and it decreases the value of asset by $4,000, hence credit the bonus receivable for $4,000.
  • Service revenue increases the value of stockholders’ equity by $16,000 hence credit the Service revenue for $16,000.

Working notes:

Calculate the value of service revenue:

Given,

Bonus accumulated is $4,000 ($500×8)

Expected bonus is $20,000

Service revenue =(Expected bonusBonus accumulated)=$20,000$4,000=$16,000 (8)

Conclusion

Therefore, the journal entry for bonus cash received is recorded.

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Chapter 5 Solutions

Intermediate Accounting

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revenue recognition; loss on...Ch. 5 - Installment sales method On July 1, 2018, Apache...Ch. 5 - Prob. 5.36BECh. 5 - Cost recovery method Refer to the situation...Ch. 5 - Prob. 5.38BECh. 5 - Prob. 5.39BECh. 5 - Revenue recognition; software contracts under IFRS...Ch. 5 - Prob. 5.41BECh. 5 - Prob. 5.1ECh. 5 - Prob. 5.2ECh. 5 - Allocating transaction price LO54 Video Planet...Ch. 5 - Prob. 5.4ECh. 5 - Prob. 5.5ECh. 5 - Prob. 5.6ECh. 5 - Prob. 5.7ECh. 5 - Prob. 5.8ECh. 5 - Prob. 5.9ECh. 5 - Variable considerationmost likely amount; change...Ch. 5 - Variable considerationexpected value; change in...Ch. 5 - Prob. 5.12ECh. 5 - Approaches for estimating stand-alone selling...Ch. 5 - FASB codification research LO56, LO57 Access the...Ch. 5 - Franchises; residual method LO56, LO57 Monitor...Ch. 5 - FASB codification research LO58 Access the FASB...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; revenue recognition over time...Ch. 5 - Long-term contract; 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