Turner, Inc. began work on a $7,000,000 contract in 2017 to construct an office building. During 2017, Turner, Inc. incurred costs of $1,700,000, billed its customers for $1,200,000, and collected $960,000. At December 31, 2017, the estimated additional costs to complete the project total $3,300,000. Prepare Turner’s 2017 journal entries using the percentage-of-completion method.
Revenue generated from this contract is $2,380,000.
As a corporation approaches the end of a long-term contract, the percentage-of-completion technique is used to calculate revenues, expenditures, and gross profit. Deferring recognition of these items until the contract's end distorts the effort (costs) and outcomes of the accounting periods (revenues).
Construction in process a/c
To Materials, Cash, Payables a/c
Accounts receivables a/c
To Billings on construction in process a/c
To Accounts receivables a/c
Construction in process a/c
Construction expenses a/c
To Revenue from contract a/c
Shaw Company sells goods that cost $300,000 to Ricard Company for $410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of $40,000. The standalone selling price of the goods is $370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.
(b) Shaw prepares an income statement for the first quarter of 2017, ending on March 31, 2017 (installation was completed on June 18, 2017). How much revenue should Shaw recognize related to its sale to Ricard?
(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.
(a) Determine the transaction price of the arrangement for Blair Biotech.
(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.
(Allocate Transaction Price) Crankshaft Company manufactures equipment. Crankshaft’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Crankshaft has the following arrangement with Winkerbean Inc.
• Winkerbean purchases equipment from Crankshaft for a price of $1,000,000 and contracts with Crankshaft to install the equipment. Crankshaft charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Crankshaft determines installation service is estimated to have a standalone selling price of $50,000. The cost of the equipment is $600,000.
• Winkerbean is obligated to pay Crankshaft the $1,000,000 upon the delivery and installation of the equipment.
Crankshaft delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.
(a) How should the transaction price of $1,000,000 be allocated among the service obligations?
(b) Prepare the journal entries for Crankshaft for this revenue arrangement on June 1, 2017 and September 30, 2017, assuming Crankshaft receives payment when installation is completed.
On January 2, 2017, Grando Company sells production equipment to Fargo Inc. for $50,000. Grando includes a 2-year assurance warranty service with the sale of all its equipment. The customer receives and pays for the equipment on January 2, 2017. During 2017, Grando incurs costs related to warranties of $900. At December 31, 2017, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty.
(a) Prepare the journal entry to record this transaction on January 2, 2017, and on December 31, 2017 (assuming financial statements are prepared on December 31, 2017).
(b) Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold an extended warranty (service-type warranty) for an additional 2 years (2019–2020) for $800.
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