Kieso, Intermediate Accounting, 2014 FASB Update, Chapter 18
EXERCISES: Set B
E18-1B (Sales with Discounts) Windsor Company sells goods to Gannon Inc. on account on January 1, 2014. The goods have a sales price of $490,000 (cost $400,000). The terms of the sale are net 30. If Gannon pays within 5 days, it receives a cash discount of $10,000. Past history indicates the cash discount will be taken.
Instructions
(a)Prepare the journal entries for Windsor for January 1, 2014.
(b)Prepare the journal entries for Windsor for January 31, 2014, assuming Gannon does not make paymentuntil January 31, 2014.
E18-2B (Transaction Price) Presented below are three revenue recognition situations.
(a)Myler sells goods to LRF for $1,200,000, payment due at delivery.
(b)Myler sells goods on account to Donley for $600,000, payment due in 30 days.
(c)Myler sells goods to Renfro for $400,000, payment due in two installments: the first installmentpayable in 18 months and the second payment due 6 months later. The present value of the futurepayments is $370,000.
Instructions
Indicate the transaction price for each of these transactions and when revenue will be recognized.
E18-3B (Contract Modification) In September 2014, Fernetti Corp. commits to selling 200 of its iPhone-compatible docking stations to Remington Co. for $20,000 ($100 per product). The stations are delivered to Remington over the next 6 months. After 120 stations are delivered, the contract is modified and Fernetti promises to deliver an additional 60 products for an additional $5,700 ($95 per station). All sales are cash on delivery.
Instructions
(a)Prepare the journal entry for Fernetti for the sale of the first 120 stations. The cost of each station is $70.
(b)Prepare the journal entry for the sale of 12 more stations after the contract modification, assumingthat the price for the additional stations reflects the standalone selling price at the time of the contractmodification. In addition, the additional stations are distinct from the original products asFernetti regularly sells the products separately.
(c)Prepare the journal entry for the sale of 12 more stations (as in (b)), assuming that the pricing for theadditional products does not reflect the standalone selling price of the additional products and theprospective method is used.
E18-4B (Contract Modification) Dolan Financial Services performs bookkeeping and tax-reporting servicesto startup companies in the Hiawatha area. On January 1, 2014, Dolan entered into a 3-year service contractwith Lindsey Tech. Lindsey promises to pay $12,000 at the beginning of each year, which at contractinception is the standalone selling price for these services. At the end of the second year, the contract ismodified and the fee for the third year of services is reduced to $10,000. In addition, Lindsey agrees to payan additional $25,000 at the beginning of the third year to cover the contract for 3 additional years (i.e.,4 years remain after the modification). The extended contract services are similar to those provided in thefirst 2 years of the contract.
Instructions
(a)Prepare the journal entries for Dolan in 2014 and 2015 related to this service contract.
(b)Prepare the journal entries for Dolan in 2016 related to the modified service contract, assuming aprospective approach.
(c)Repeat the requirements for part (b), assuming Dolan and Lindsey agree on a revised set of services(fewer bookkeeping services but more tax services) in the extended contract period andthe modification results in a separate performance obligation.
E18-5B (Variable Consideration) Carey Biotech enters into a licensing agreement with Yang Pharmaceuticalfor a drug under development. Carey will receive a payment of $15,000,000 if the drug receives regulatoryapproval. Based on prior experience in the drug-approval process, Carey determines it is 90% likely that thedrug will gain approval and a 10% chance of denial.
Instructions
(a)Determine the transaction price of the arrangement for Carey Biotech.
(b)Assuming that regulatory approval was granted on December 20, 2014, and that Carey received thepayment from Yang on January 15, 2015, prepare the journal entries for Carey.
E18-6B (Trailing Commission) Bosch’s Agency sells an insurance policy offered by Hickman InsuranceCompany for a commission of $200. In addition, Bosch will receive an additional commission of $20 eachyear for as long as the policyholder does not cancel the policy. After selling the policy, Bosch does nothave any remaining performance obligations. Based on Bosch’s significant experience with these types ofpolicies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence tosuggest that previous policyholder behavior will change.
Instructions
(a)Determine the transaction price of the arrangement for Bosch, assuming 100 policies are sold.
(b)Prepare the journal entries, assuming that the 100 policies are sold in January 2014 and that Boschreceives commissions from Hickman.
E18-7B (Sales with Discounts) On July 3, 2014, Wynn Company sold to SueOlson merchandise havinga sales price of $9,000 (cost $5,400) with terms of 2/10, n/60, f.o.b. shipping point. Wynn estimatesthat merchandise with a sales value of $900 will be returned. An invoice totaling $150, terms n/30, wasreceived by Olson on July 8 from Simpson Transport Service for the freight cost. Upon receipt of thegoods, on July 5, Olson notified Wynn that $300 of merchandise contained flaws. The same day, Wynnissued a credit memo covering the defective merchandise and asked that it be returned at Wynn’s expense.Wynn estimates the returned items to have a fair value of $150. The freight on the returned merchandisewas $30, paid by Wynn on July 7. On July 12, the company received a check for the balance due fromOlson.
Instructions
(a)Prepare journal entries for Wynn Company to record all the events noted above assuming sales andreceivables are entered at gross selling price.
(b)Prepare the journal entry assuming that Sue Olson did not remit payment until September 5.
E18-8B (Sales with Discounts) Larkin Marina has 300 available slips that rent for $1,000 per season.Payments must be made in full at the start of the boating season, April 1, 2015. The boating season endsOctober 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paidfor by December 31, 2015. Under a new policy, if payment for 2016 season slips is made by December 31,2015, a 5% discount is allowed. If payment for 2017 season slips is made by December 31, 2015, rentersget a 20% discount (this promotion hopefully will provide cash flow for major dock repairs).On December 31, 2014, all 300 slips for the 2015 season were rented at full price.
On December 31, 2015,200 slips were reserved and paid for the 2016 boating season, and 60 slips were reserved and paid for the2017 boating season.
Instructions
(a)Prepare the appropriate journal entries for December 31, 2014, and December 31, 2015.
(b)Assume the marina operator is unsophisticated in business. Explain the managerial significance ofthe above accounting to this person.
E18-9B (Allocate Transaction Price) Cabrera Co. enters into a contract to sell Product A and Product B onJanuary 2, 2014, for an upfront cash payment of $220,000. Product A will be delivered in 2 years (January 2,2016) and Product B will be delivered in 5 years (January 2, 2019). CabreraCo. allocates the $220,000 toProducts A and B on a relative standalone selling price basis as follows.
StandalonePercentAllocated
Selling PricesAllocatedAmounts
Product A$ 60,00025%$ 55,000
Product B 180,00075% 165,000
$240,000$220,000
Cabrera Co. uses an interest rate of 6%, which is its incremental borrowing rate.
Instructions
(a)Prepare the journal entries necessary on January 2, 2014, and December 31, 2014.
(b)Prepare the journal entries necessary on December 31, 2015.
(c)Prepare the journal entries necessary on January 2, 2016.
E18-10B (Allocate Transaction Price) Tate Company sells goods that cost $450,000 to Norris Company for$610,000 on January 2, 2014. The sales price includes an installation fee, which is valued at $60,000. The fairvalue of the goods is $550,000. The installation is considered a separate performance obligation and isexpected to take 6 months to complete.
Instructions
(a)Prepare the journal entries (if any) to record the sale on January 2, 2014.
(b)Tate prepares an income statement for the first quarter of 2014, ending on March 31, 2014 (installationwas completed on June 18, 2014). How much revenue should Tate recognize related to its saleto Norris?
E18-11B (Allocate Transaction Price) Talkington Company manufactures equipment. Talkington’s productsrange from simple automated machinery to complex systems containing numerous components. Unitselling prices range from $400,000 to $1,500,000 and are quoted inclusive of installation. The installationprocess does not involve changes to the features of the equipment and does not require proprietary informationabout the equipment in order for the installed equipment to perform to specifications. Talkington has the following arrangement with Henderson Inc.
- Henderson purchases equipment from Talkington for a price of $1,200,000 and contracts withTalkington to install the equipment. Talkington charges the same price for the equipmentirrespective of whether it does the installation or not. Using market data, Talkington determinesinstallation service is estimated to have a fair value of $50,000. The cost of the equipment is$750,000.
- Henderson is obligated to pay Talkington the $1,200,000 upon the delivery and installation of theequipment.
Talkington delivers the equipment on June 1, 2014, and completes the installation of the equipment onSeptember 30, 2014. The equipment has a useful life of 10 years. Assume that the equipment and the installationare two distinct performance obligations which should be accounted for separately.
Instructions
(a)How should the transaction price of $1,200,000 be allocated among the service obligations?
(b)Prepare the journal entries for Talkington for this revenue arrangement in 2014 assuming Talkington receives payment when installation is completed.
E18-12B (Allocate Transaction Price) Refer to the revenue arrangement in E18-11B.
Instructions
Repeat requirements (a) and (b) assuming Talkington does not have market data with which to determinethe standalone selling price of the installation services. As a result, an expected cost plus marginapproach is used. The cost of installation is $32,000; Talkington prices these services with a 25% margin
relative to cost.
E18-13B (Allocate Transaction Price) The Oven Center is an experienced home appliance dealer.The Oven Center also offers a number of services together with the home appliances that it sells. Assumethat The Oven Center sells ovens on a standalone basis. The Oven Center also sells installation servicesand maintenance services for ovens. However, The Oven Center does not offer installation or maintenanceservices to customers who buy ovens from other vendors. Pricing for ovens is as follows.
Oven only$1,200
Oven with installation service1,275
Oven with maintenance services1,460
Oven with installation and maintenance services1,500
In each instance in which maintenance services are provided, the maintenance service is separatelypriced within the arrangement at $260. Additionally, the incremental amount charged by The Oven Centerfor installation approximates the amount charged by independent third parties. Ovens are sold subject toa general right of return. If a customer purchases an oven with installation and/or maintenance services,in the event The Oven Center does not complete the service satisfactorily, the customer is only entitled toa refund of the portion of the fee that exceeds $1,200.
Instructions
(a)Assume that a customer purchases an oven with both installation and maintenance services for$1,500. Based on its experience, The Oven Center believes that it is probable that the installation ofthe equipment will be performed satisfactorily to the customer. Assume that the maintenance servicesare priced separately. Identify the separate performance obligations related to the The Oven Centerrevenue arrangement.
(b)Indicate the amount of revenue that should be allocated to the oven, the installation, and to themaintenance contract.
E18-14B (Sales with Returns) Natural Growth Company is presently testing a number of new agriculturalseeds that it has recently harvested. To stimulate interest, it has decided to grant to five of its largest customersthe unconditional right of return to these products if not fully satisfied. The right of return extendsfor 4 months. Natural Growth sells these seeds on account for $1,800,000 (cost $950,000) on January 2, 2014.Customers are required to pay the full amount due by March 15, 2014.
Instructions
(a)Prepare the journal entry for Natural Growth at January 2, 2014, assuming Natural Growth estimatesreturns of 20% based on prior experience.
(b)Assume that one customer returns the seeds on March 1, 2014, due to unsatisfactory performance.Prepare the journal entry to record this transaction, assuming this customer purchased $120,000 ofseeds from Natural Growth.
(c)Briefly describe the accounting for these sales if Natural Growth is unable to reliably estimate returns.
E18-15B (Sales with Returns) Gibbs Publishing Co. publishes college textbooks that are sold to bookstoreson the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment isdue 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer’s expense.Sales are made only to retailers who have good credit ratings. Past experience indicates that the normalreturn rate is 15%, and the average collection period is 72 days.
Instructions
(a)Identify the revenue recognition criteria that Gibbs could employ concerning textbook sales.
(b)Briefly discuss the reasoning for your answers in (a) above.
(c)On July 1, 2014, Gibbs shipped books invoiced at $12,000,000 (cost $8,000,000). Prepare the journalentry to record this transaction.
(d)On October 3, 2014, $1.0 million of the invoiced July sales were returned according to the returnpolicy, and the remaining $11.0 was paid. Prepare the journal entries for the return and payment.
E18-16B (Sales with Repurchase) Molina Corp. sells idle machinery to Hollis Company on July 1,2014, for $50,000. Molina agrees to repurchase this equipment from Hollis on June 30, 2015, for a priceof $53,000 (an imputed interest rate of 6%).
Instructions
(a)Prepare the journal entry for Molina for the transfer of the asset to Hollis on July 1, 2014.
(b)Prepare any other necessary journal entries for Molina in 2014.
(c)Prepare the journal entry for Molina when the machinery is repurchased on June 30, 2015.
E18-17B (Repurchase Agreement) Yates Inc. enters into an agreement on March 1, 2014, to sell JasperMetal Company aluminum ingots in 2 months. As part of the agreement, Yates also agrees to repurchasethe ingots in 60 days at the original sales price of $300,000 plus 3%. (Because Yates has an unconditionalobligation to repurchase the ingots at an amount greater than the original sales price, the transaction istreated as a financing.)
Instructions
(a)Prepare the journal entry necessary on March 1, 2014.
(b)Prepare the journal entry for the repurchase of the ingots on May 1, 2014.
E18-18B (Bill and Hold) Lockhart Company is involved in the design, manufacture, and installationof various types of wood products for large construction projects. Lockhart recently completeda large contract for Woolard Inc., which consisted of building 60 different types of concession countersfor a new soccer arena under construction. The terms of the contract are that upon completion of thecounters, Woolard would pay $4,000,000. Unfortunately, due to the depressed economy, the completionof the new soccer arena is now delayed. Woolard has therefore asked Lockhart to hold thecounters for 2 months at its manufacturing plant until the arena is completed. Woolard acknowledgesin writing that it ordered the counters and that they now have ownership. The time that LockhartCompany must hold the counters is totally dependent on when the arena is completed. Because Lockhart has not received additional progress payments for the arena due to the delay, Woolard has provideda deposit of $400,000.
Instructions
(a)Explain this type of revenue recognition transaction.
(b)What factors should be considered in determining when to recognize revenue in thistransaction?
(c)Prepare the journal entry(ies) that Lockhart should make, assuming it signed a valid sales contractto sell the counters and received at the time the $400,000 deposit.
E18-19B (Consignment Sales) On May 3, 2014, Norman Company consigned 80 freezers, costing $400each, to Tomkins Company. The cost of shipping the freezers amounted to $670 and was paid by NormanCompany. On December 31, 2014, a report was received from the consignee, indicating that 40 freezershad been sold for $600 each. Remittance was made by the consignee for the amount due after deductinga commission of 5%, advertising of $150, and total installation costs of $260 on the freezers sold.
Instructions
(a)Compute the inventory value of the units unsold in the hands of the consignee.
(b)Compute the profit for the consignor for the units sold.
(c)Compute the amount of cash that will be remitted by the consignee.
E18-20B (Warranty Arrangement) On December 31, 2014, Barone Company sells production equipmentto Fargo Inc. for $75,000. Barone includes a 1-year assurance warranty service with the sale of all itsequipment. The customer receives and pays for the equipment on December 31, 2014. Barone estimatesthe prices to be $73,200 for the equipment and $1,800 for the cost of the warranty.
Instructions
(a)Prepare the journal entry to record this transaction on December 31, 2014.
(b)Repeat the requirements for (a), assuming that in addition to the assurance warranty, Baronesold an extended warranty (service-type warranty) for an additional 2 years (2016–2017) for $1,200.
E18-21B (Warranties) Eaton Inc. manufactures and sells computers that include an assurance-type warrantyfor the first 90 days. Eaton offers an optional extended coverage plan under which it will repairor replace any defective part for 3 years from the expiration of the assurance-type warranty. Becausethe optional extended coverage plan is sold separately, Eaton determines that the 3 years of extendedcoverage represent a separate performance obligation. The total transaction price for the sale of a computerand the extended warranty is $2,700 on October 1, 2014, and Eaton determines the standaloneselling price of each is $2,400 and $300, respectively. Further, Eaton estimates, based on historical experience,it will incur $200 in costs to repair defects that arise within the 90-day coverage period for theassurance-type warranty. The cost of the equipment is $1,100.
Instructions
(a)Prepare the journal entry (ies) to record the sale of the computer, cost of goods sold, and liabilitiesrelated to the warranties.
(b)Briefly describe the accounting for the service-type warranty after the 90-day assurance-typewarranty period.