When is revenue recognized in the following situations? (a) Revenue from selling products, (b) revenue from services performed, (c) revenue from permitting others to use company assets, and (d) revenue from disposing of assets other than products.
According to the revenue recognition principle, revenue is recognized when goods are exchanged for some consideration (amount) or when services are performed and receive some amount/cash in return.
According to the revenue recognition concept, revenue is recognized in the following situations as follows:
Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.
1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is $500. The standalone selling price of the tablet is $250 (the cost to Tablet Tailors is $175). Tablet Tailors sells the Internet access service independently for an upfront payment of $300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of $50,000 in cash.
2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for $600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of $150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of $120,000 in cash.
(c) Repeat the requirements for part (a), assuming that Tablet Tailors has no reliable data with which to estimate the stand-alone selling price for the Internet service.
On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of $700,000 (cost $560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of $78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2017, and (b) $78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.
(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2019. The following information is available.
2017 2018 2019
Costs incurred to date $400,000 $825,000 $1,070,000
Estimated costs to complete 600,000 275,000 –0–
Billings to date 300,000 900,000 1,600,000
Collections to date 270,000 810,000 1,425,000
(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.
(b) Prepare all necessary journal entries for 2018.
(c) Compute the amount of gross profit to be recognized each year, assuming the completed-contract method is used.
Guillen, Inc. began work on a $7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process $1,715,000, Accounts Receivable $240,000, and Billings on Construction in Process $1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2017, balance sheet.
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