Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $57,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $19,000 or will be entitled to an additional $19,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $19,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $19,000. Record the entry to record revenue each month for the first four months of the contract Record the entry at the start of fifth month, to recognize the change in estimate associated with the reduced likelihood that the $19,000 bonus will be received. Record the entry to record revenue each month for the second four months of the contract. Record the entry after eight months to record receipt of the $19,000 bonus

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $57,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $19,000 or will be entitled to an additional $19,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $19,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $19,000.

Record the entry to record revenue each month for the first four months of the contract
- Record the entry at the start of fifth month, to recognize the change in estimate associated with the reduced likelihood that the $19,000 bonus will be received.
  
  Record the entry to record revenue each month for the second four months of the contract.
  
  Record the entry after eight months to record receipt of the $19,000 bonus

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