Brief Exercise 18-16

  

 

 

Crane Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is $67,000. Crane Inc. receives a commission of 7% of the total price. Crane Inc. therefore remits $62,310 to ShipAway.
 

Prepare the journal entry to record the remittance and revenue recognized by Crane Inc. on this transaction. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.)

Brief Exercise 18-7

  

 

Monty Corp. enters into a contract with a customer to build an apartment building for $979,400. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $144,300 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $48,100 each week that completion is delayed. Monty commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

  

Completed by

Probability

 

August 1, 2018

70

%

 

August 8, 2018

20

 

August 15, 2018

5

 

After August 15, 2018

5

 (a) Determine the transaction price for the contract, assuming Monty is only able to estimate whether the building can be completed by August 1, 2018, or not (Monty estimates that there is a 70% chance that the building will be completed by August 1, 2018). (If answer is 0, please enter 0. Do not leave any fields blank.)

 (b) Determine the transaction price for the contract, assuming Monty has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline. (If answer is 0, please enter 0. Do not leave any fields blank.)

Brief Exercise 18-12

Flint Company sells goods to Buffalo Company during 2017. It offers Buffalo the following rebates based on total sales to Buffalo. If total sales to Buffalo are 10,100 units, it will grant a rebate of 2%. If it sells up to 19,700 units, it will grant a rebate of 5%. If it sells up to 32,800 units, it will grant a rebate of 5%. In the first quarter of the year, Flint sells 10,400 units to Buffalo at a sales price of $114,400. Flint, based on past experience, has sold over 37,900 units to Buffalo, and these sales normally take place in the third quarter of the year.
 

What amount of revenue should Flint report for the sale of the 10,400 units in the first quarter of the year?

        

Exercise 18-8

Concord’s Agency sells an insurance policy offered by       Capital Insurance Company for a commission of $99 on January 2, 2017.       Concord will receive an additional commission of $9 each year for as long       as the policyholder does not cancel the policy. After selling the policy,       Concord does not have any remaining performance obligations. Based on Concord’s       significant experience with these types of policies, it estimates that       policyholders on average renew the policy for 4.5 years after the       first year before terminating their insurance policy. It has no evidence       to suggest that previous policyholder behavior will change.

            

  

  

         

 

 

Determine the transaction price of the arrangement for       Concord, assuming 90 policies are sold.

  

Transaction         price

$

   

 

  

  

         

 

Determine       the revenue that Concord will recognize in 2017. (Round       answer to 0 decimal places, e.g. 5,125.)

  

Revenue

$

        

Exercise 18-7

Metlock Biotech enters into a licensing agreement with Pang       Pharmaceutical for a drug under development. Metlock will receive a       payment of $10,900,000 if the drug receives regulatory approval. Based on       prior experience in the drug-approval process, Metlock determines it is       75% likely that the drug will gain approval and a 25% chance of denial.

            

  

  

         

 

 

Determine       the transaction price of the arrangement for Metlock Biotech.

  

Transaction price

$

           

  

  

         

 

Assuming that regulatory approval was granted on December       20, 2017, and that Metlock received the payment from Pang on January 15,       2018, prepare the journal entries for Metlock. The license meets the       criteria for point-in-time revenue recognition. (Credit       account titles are automatically indented when the amount is       entered. Do not indent manually. If no entry is required, select       “No entry” for the account titles and enter 0 for the amounts.)

        

Exercise 18-14 (Part       Level Submission)

Carla       Company manufactures equipment. Carla’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. Carla has the following arrangement with       Winkerbean Inc.

  

●

Winkerbean purchases         equipment from Carla for a price of $920,000 and contracts with Carla         to install the equipment. Carla charges the same price for the         equipment irrespective of whether it does the installation or not.         Using market data, Carla determines installation service is estimated         to have a standalone selling price of $50,500. The cost of the         equipment is $643,000.

 

●

Winkerbean is obligated         to pay Carla the $920,000 upon the delivery and installation of the         equipment.

       Carla 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.
 

      Assuming Carla does not have market data with which to determine the       standalone selling price of the installation services. As a result, an       expected cost plus margin approach is used. The cost of installation is       $32,500; Carla prices these services with a 20% margin relative to cost.

            

  

  

      

(a)  

How should the transaction       price of $920,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers       to 0 decimal places.)

  

Equipment

$

 

Installation

$

   

            

  

  

      

(b)

Prepare the journal entries       for Carla for this revenue arrangement on June 1, 2017, assuming Carla receives       payment when installation is completed. (Credit account titles are automatically indented when the       amount is entered. Do not indent manually. If no entry is required,       select “No entry” for the account titles and enter 0 for the       amounts.)

        

Problem 18-5

Cheyenne       Ranch & Ayayai is a distributor of ranch and farm equipment. Its       products range from small tools, power equipment for trench-digging and       fencing, grain dryers, and barn winches. Most products are sold direct       via its company catalog and Internet site. However, given some of its       specialty products, select farm implement stores carry Cheyenne’s       products. Pricing and cost information on three of Cheyenne’s most       popular products are as follows.

  

Item

Standalone
        Selling Price (Cost)

 

Mini-trencher

$ 3,900

($2,000

)

 

Power fence hole auger

1,400

(800

)

 

Grain/hay dryer

13,400

(11,800

)

       Respond to the requirements related to the following independent revenue       arrangements for Cheyenne Ranch & Ayayai.

            

  

  

         

 

 

On January       1, 2017, Cheyenne sells 50 augers to Mills Farm & Fleet for $70,000.       Mills signs a 6-month note at an annual interest rate of 12%. Cheyenne       allows Mills to return any auger that it cannot use within 50 days and       receive a full refund. Based on prior experience, Cheyenne estimates that       5% of units sold to customers like Mills will be returned (using the most       likely outcome approach). Cheyenne’s costs to recover the products will       be immaterial, and the returned augers are expected to be resold at a profit.       Prepare the journal entry for Cheyenne on January 1, 2017. (Credit       account titles are automatically indented when the amount is entered. Do       not indent manually. If no entry is required, select “No entry”       for the account titles and enter 0 for the amounts.)

 

  

  

         

 

 

On       August 10, 2017, Cheyenne sells 15 mini-trenchers to a farm co-op in       western Minnesota. Cheyenne provides a 4% volume discount on the       mini-trenchers if the co-op has a 15% increase in purchases from Cheyenne       compared to the prior year. Given the slowdown in the farm economy, sales       to the co-op have been flat, and it is highly uncertain that the       benchmark will be met. Prepare the journal entry for Cheyenne on August       10, 2017. (Credit account titles       are automatically indented when the amount is entered. Do not indent       manually. If no entry is required, select “No entry” for the       account titles and enter 0 for the amounts. Round intermediate       calculations to 6 decimal places, e.g. 1.246576 and final answers to 0       decimal places, e.g. 5,125.)

  

  

         

 

 

Cheyenne       sells three grain/hay dryers to a local farmer at a total contract price       of $43,400. In addition to the dryers, Cheyenne provides installation,       which has a standalone selling price of $1,000 per unit installed. The       contract payment also includes a $1,100 maintenance plan for the dryers       for 3 years after installation. Cheyenne signs the contract on June 20,       2017, and receives a 20% down payment from the farmer. The dryers are       delivered and installed on October 1, 2017, and full payment is made to       Cheyenne. Prepare the journal entries for Cheyenne in 2017 related to       this arrangement. (Credit account titles       are automatically indented when the amount is entered. Do not indent       manually. If no entry is required, select “No entry” for the       account titles and enter 0 for the amounts.)

 

  

  

         

 

On       April 25, 2017, Cheyenne ships 100 augers to Ayayai Depot, a farm supply       dealer in Nebraska, on consignment. By June 30, 2017, Ayayai Depot has       sold 50 of the consigned augers at the listed price of $1,400 per unit.       Ayayai Depot notifies Cheyenne of the sales, retains a 10% commission,       and remits the cash due Cheyenne. Prepare the journal entries for       Cheyenne and Ayayai Depot for the consignment arrangement. (Credit       account titles are automatically indented when the amount is       entered. Do not indent manually. If no entry is required, select       “No entry” for the account titles and enter 0 for the amounts.)