Chapter 17, Problem 3P

1.

To determine

Prepare journal entries to record the revenue recognition.

Explanation of Solution

Revenue recognition by Companies:

Companies must recognise revenues to represent the “Transmission of promised goods and services to customers in an amount that reflects the consideration” to which the entity anticipates to be authorized in exchange for those good and services.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entries:

Date	Account title and explanation	Debit ($)	Credit ($)
January,2017	Cash(1)	7,500
	Sales revenue		7,500
	(To record the sale of watch)
Febraury,2017	Cash(2)	5,000
	Sales revenue		5,000
	(To record the sale of watch)
March,2017	Cash(1)	7,500
	Sales revenue		7,500
	(To record the sale of watch)

Table (1)

To record the sale of watch during January 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $7,500.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $7,500.

To record the sale of watch during February2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $5,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $5,000.

To record the sale of watch during March 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $7,500.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $7,500.

Working notes:

(1) Calculate the amount of sales revenue for the month of January and March:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}\text{30}\text{watches}\text{×}\text{\$250}\\ \text{=\$7,500}\end{array}$

(2)Calculate the amount of sales revenue during the month of February:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}2\text{0}\text{watches}\text{×}\text{\$250}\\ \text{=\$5,000}\end{array}$

2.

To determine

Prepare journal entries to record the sale of watch during the months of April, May and June.

Explanation of Solution

The additional watches are “distinct and the price reveals the stand-alone selling

Price”, the modification will be taken as a separate contract. Then, Company F will make the following journal entries to record the delivery of the watches:

Date	Account title and explanation	Debit ($)	Credit ($)
April, 2017	Cash(3)	5,000
	Sales revenue		5,000
	(To record the delivery of the final 20 watches under the original contract)
May,2017	Cash(4)	4,100
	Sales revenue		4,100
	(To record the delivery of the final 20 watches under the modified contract)
June,2017	Cash(5)	4,100
	Sales revenue		4,100
	(To record the delivery of the final 20 watches under the modified contract)

Table (2)

To record the delivery of the final 20 watches under the original contract during April, 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $5,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $5,000.

To record the delivery of the final 20 watches under the original contract during May, 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $4,100.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $4,100.

To record the delivery of the final 20 watches under the original contract during June, 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $4,100.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $4,100.

Working notes:

(3)Calculate the amount of sales revenue during the month of April:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}2\text{0}\text{watches}\text{×}\text{\$250}\\ \text{=\$5,000}\end{array}$

(4)Calculate the amount of sales revenue during the month of May:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}2\text{0}\text{watches}\text{×}\text{\$205}\\ \text{=\$4,100}\end{array}$

(5)Calculate the amount of sales revenue during the month of June:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}2\text{0}\text{watches}\text{×}\text{\$205}\\ \text{=\$4,100}\end{array}$

3.

To determine

Prepare journal entries to record the sale of watches during the months of April, May and June.

Explanation of Solution

The modification does not create a “separate contract and a prospective approach “is used to account for the modification, Since the additional watches are distinct, but the price does not reflect the stand-alone selling price. The remaining consideration is$13,200 $\text{(4,400}\text{(8)}\text{×}\text{3}\text{years)}$ which is allocated over the remaining 3-year contract period at an amount of $220 $\text{(13,200}\text{÷}\text{60}\text{watches)}$ per watch. Even though the customer will be billed according to the sales prices recognized by the contracts, Company F will recognize revenue using the prospective method. Consequently, Company F will make the following entries to record the sale of the watches:

Date	Account title and explanation	Debit ($)	Credit ($)
April,2017	Cash(6)	5,000
	Sales revenue(8)		4,400
	Unearned revenue (Balancing figure)		600
	(To record delivery of watches under the original contract)
May,2017	Unearned revenue (Balancing figure)	300
	Cash(7)	4,100
	Sales revenue(8)		4,400
	(To record delivery of watches under the modified contract)
June,2017	Unearned revenue (Balancing figure)	300
	Cash(7)	4,100
	Sales revenue(8)		4,400
	(To record delivery of watches under the modified contract)

Table (3)

 To record delivery of watches under the original contract during April, 2017:

• Cash is an asset and it is increased. Therefore, debit cash account by $5,000.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $4,400.
• Unearned revenue is a liability and it is increased. Therefore, credit unearned revenue account by $600.

 To record delivery of watches under the original contract during May, 2017:

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by $300.
• Cash is an asset and it is increased. Therefore, debit cash account by $4100.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $4,400.

 To record delivery of watches under the original contract during June, 2017:

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by $300.
• Cash is an asset and it is increased. Therefore, debit cash account by $4100.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $4,400.

Working notes:

(6)Calculate the amount of cash during April:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}2\text{0}\text{watches}\text{×}\text{\$250}\\ \text{=\$5,000}\end{array}$

(7)Calculate the amount of cash during May and June:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}\text{20}\text{watches}\text{×}\text{\$205}\\ \text{=\$4,100}\end{array}$

(8)Calculate the amount of sales revenue allocated over the remaining 3-year contract period:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\frac{\left[\begin{array}{l}\left(\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\right)\text{+}\\ \left(\text{Number}\text{of}\text{additional}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\right)\end{array}\right]}{\text{3}\text{years}}\\ \text{=}\frac{\left[\begin{array}{l}\left(\text{20}\text{watches}\text{×}\text{\$250}\right)\text{+}\\ \left(\text{40}\text{watches}\text{×}\text{\$205}\right)\end{array}\right]}{\text{3}\text{years}}\\ \text{=}\frac{\text{\$5,000}\text{+}\text{\$8,200}}{\text{3}\text{years}}\\ \text{=\$4,400}\end{array}$

4.

To determine

Prepare journal entries to report the sale of watches during the months of April, May and June.

Explanation of Solution

• “A cumulative catch-up approach “is used to account for the Modification, since the goods are not distinct, the modification does not create a separate contract.
• Total revenues under the original contract and the modification are$24,100 (9) or $241 per watch $\left(\text{\$24,100÷100 watches}\right)$.
• Company Must recognize $19,280 in revenue for the watches it has previously delivered $\left(\text{80 watches× \$241}\right)$. Because it had previously recognized $20,000 (80 watches × $250), it must reduce revenue by $720 $\left(\text{\$19,280 – \$20,000}\right)\text{.}$
• To be exact, as a result of the contract modification, $9 for each watch formerly sold is now considered to be unearned revenue. Thus, Company F will make the following entry at the time of modification:

Prepare journal entries:

Date	Account title and explanation	Debit ($)	Credit ($)
April,2017	Sales revenue	720
	Unearned revenue(13)		720
	( To record the amount of unearned revenue)

Table (4)

Date	Account title and explanation	Debit ($)	Credit ($)
April,2017	Unearned revenue (14)	360
	Cash(15)	2,050
	Sales revenue(16)		2,410
	( To record the sale of watch under modified contract)

Table (5)

Date	Account title and explanation	Debit ($)	Credit ($)
May,2017	Unearned revenue (17)	180
	Cash(18)	1,025
	Sales revenue(19)		1,205
	( To record the sale of watch under modified contract)

Table (6)

Date	Account title and explanation	Debit ($)	Credit ($)
June,2017	Unearned revenue (17)	180
	Cash(18)	1,025
	Sales revenue(19)		1,205
	( To record the sale of watch under modified contract)

Table (7)

To record the amount of unearned revenue during April, 2017:

• Sales revenue is a component of stockholder’s equity and it is decreased. Therefore, debit sales revenue account by $ 720.
• Unearned revenue is a liability and it is increased. Therefore, credit sales revenue account by$720.

To record the sale of watch under modified contract during April, 2017:

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by $360.
• Cash is an asset and it is increased. Therefore, debit cash account by $2,050.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $2,410.

To record the sale of watch under modified contract during May, 2017:

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by $180.
• Cash is an asset and it is increased. Therefore, debit cash account by $1,025.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $1,205.

To record the sale of watch under modified contract during June, 2017:

• Unearned revenue is a liability and it is decreased. Therefore, debit unearned revenue account by $180.
• Cash is an asset and it is increased. Therefore, debit cash account by $1,025.
• Sales revenue is a component of stockholders’ equity and it is increased. Therefore, credit sales revenue account by $1,205.

Working notes:

(9)Calculate the amount of total revenues under original contract and the modification:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{revenues}\text{under}\\ \text{original}\text{contract}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Watches}\text{to}\text{be}\text{delivered}\text{on}\text{April}\text{1,2017}\text{×}\text{Price}\text{per}\text{watch}\right)\text{+}\\ \left(\begin{array}{l}\text{Remaining}\text{watches}\text{from}\text{the}\text{original}\text{order}\\ \text{of}\text{100}\text{watches}\text{×}\text{price}\text{per}\text{watch}\end{array}\right)\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\text{80}\text{watches}\text{×}\text{\$250}\right)\text{+}\\ \left(\text{20}\text{watches}\text{×}\text{\$205}\right)\end{array}\right]\\ =\$20,000+\$4,100\\ \text{=\$24,100}\end{array}$

(10)Calculate the price per watch for 100 watches:

$\begin{array}{c}\text{Price}\text{per}\text{watch}\text{for}\text{100}\text{watches}\text{=}\frac{\text{Total}\text{revenues}\text{under}\text{original}\text{contract}}{\text{Number}\text{of}\text{watches}}\\ \text{=}\frac{\text{\$24,100}\text{(9)}}{\text{\$100}}\\ \text{=\$241}\end{array}$

(11)Calculate the revenue recognized for the already delivered 80 watches:

$\begin{array}{c}\text{Revenue}\text{recognised}\text{for}\text{80}\text{watches}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=80}\text{watches}\text{×\$241}(10)\\ \text{=\$19,280}\end{array}$

(12)Calculate the previously recognized revenue for 80 watches:

$\begin{array}{c}\text{Previously}\text{recognised}\text{revenue}\text{for}\text{80}\text{watches}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=80}\text{watches}\text{×}\text{\$250}\\ \text{=\$20,000}\end{array}$

(13)Calculate the amount of decrease in revenue:

$\begin{array}{c}\text{Decrease}\text{in}\text{revenue =}\left(\begin{array}{l}\text{Previously}\text{recognised}\text{revenue}\text{for}\text{80}\text{watches}-\\ \text{Revenue}\text{recognised}\text{for}\text{80}\text{watches}\end{array}\right)\\ \text{=\$20,000 (12)}-\text{\$19,}\text{280}\text{(11)}\\ \text{=\$720}\end{array}$

(14)Calculate the amount of unearned revenue during the month of April:

$\begin{array}{c}\begin{array}{l}\text{Unearned}\text{revenue}\text{during}\\ \text{the}\text{month}\text{of}\text{April}\end{array}\}\text{=}\frac{\text{Number}\text{of}\text{watches}\text{sold}\text{during}\text{April}}{\text{Total}\text{number}\text{of}\text{watches}}\text{×}\text{Decrease}\text{in}\text{revenue}\\ \text{=}\frac{\text{10}\text{watches}}{\text{20}\text{watches}}\text{×}\text{\$720}\text{(13)}\\ \text{=\$360}\end{array}$

(15)Calculate the amount of cash received during the month of April:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}\text{10}\text{watches}\text{×}\text{\$205}\\ \text{=\$2,050}\end{array}$

(16)Calculate the amount of sales revenue during the month of April:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}\text{10}\text{watches}\text{×}\text{\$241}\\ \text{=\$}\text{2,410}\end{array}$

(17)Calculate the amount of unearned revenue during the month of May and June:

$\begin{array}{c}\begin{array}{l}\text{Unearned}\text{revenue}\text{during}\\ \text{the}\text{month}\text{of}\text{April}\end{array}\}\text{=}\frac{\text{Number}\text{of}\text{watches}\text{sold}\text{during}\text{April}}{\text{Total}\text{number}\text{of}\text{watches}}\text{×}\text{Decrease}\text{in}\text{revenue}\\ \text{=}\frac{5\text{watches}}{\text{20}\text{watches}}\text{×}\text{\$720}\text{(13)}\\ \text{=\$180}\end{array}$

(18)Calculate the amount of cash received during the month of May and June:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}5\text{watches}\text{×}\text{\$205}\\ \text{=\$1,025}\end{array}$

(19)Calculate the amount of sales revenue during the month of May and June:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\text{Number}\text{of}\text{watches}\text{×}\text{Price}\text{per}\text{watch}\\ \text{=}5\text{watches}\text{×}\text{\$241}\\ \text{=\$}1,205\end{array}$