ACC 3302 - Chapter 17

E17.8 (LO 2, 3) (Determine Transaction Price)

Aaron's Agency sells an insurance policy offered by Capital Insurance Company for a commission of $100 on January 2, 2025. In addition, Aaron will receive an additional commission of $10 each year for as long as the policyholder does not cancel the policy. Based on Aaron's significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years, which results in an expected policy life of 5.5 years. It has no evidence to suggest that previous policyholder behavior will change. Instructions Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold. Determine the revenue that Aaron will recognize in 2025.

CE17.1

Access the glossary ("Master Glossary") to answer the following. What is the definition of a customer? What is a performance obligation? How is standalone selling price defined? What is a transaction price?

Q14.

Allee Corp. is evaluating a revenue arrangement to determine proper revenue recognition. The contract is for construction of 10 speedboats for a contract price of $400,000. The customer needs the boats in its showrooms by February 1, 2026, for the boat purchase season; the customer provides a bonus payment of $21,000 if all boats are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after February 15, 2026. Allee frequently includes such bonus terms in its contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome. What approach should Allee use to determine the transaction price for this contract? Explain.

P17.12 (LO 8) (Franchise Revenue)

Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions. The franchisee is charged an initial fee of $120,000. Of this amount, $20,000 is payable when the agreement is signed, and a $100,000 zero-interest-bearing note is payable with a $20,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of $20,000, each discounted at 10%, is $75,816. All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation canceled if, for any reason, the franchisee fails to open his or her franchise. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Amigos helps maintain the brand value of the franchise. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least $20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%. Instructions Discuss the alternatives that Amigos Burrito Inc. might use to account for the franchise fees. Prepare the journal entries for the initial and continuing franchise fees, assuming: Franchise agreement is signed on January 5, 2025. Amigos completes franchise startup tasks and the franchise opens on July 1, 2025. The franchisee records $260,000 in

Q29.

Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, nonrefundable fee of $300 and a usage fee of $5 per month. Students may renew the service without paying another upfront fee for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?

CE17.3

Describe the accounting for refund liabilities.

Q30.

Describe the conditions when contract assets and liabilities are recognized and presented in financial statements.

Q5.

Describe the critical factor in evaluating whether a performance obligation is satisfied.

Q3.

Describe the revenue recognition principle.

BE17.4 (LO 2)

Destin Company signs a contract to manufacture a new 3D printer for $80,000. The contract includes installation which costs $4,000 and a maintenance agreement over the life of the printer at a cost of $10,000. The printer cannot be operated without the installation. Destin Company as well as other companies could provide the installation and maintenance agreement. What are Destin Company's performance obligations in this contract?

UYJ17.4

Diversified Industries manufactures sump-pumps. Its most popular product is called the Super Soaker, which has a retail price of $1,200 and costs $540 to manufacture. It sells the Super Soaker on a standalone basis directly to businesses. Diversified also provides installation services for these commercial customers, who want an emergency pumping capability (with regular and back-up generator power) at their businesses. Diversified also distributes the Super Soaker through a consignment agreement with Menards. Income data for the first quarter of 2025 from operations other than the Super Soaker are as follows. Revenues $9,500,000 Expenses 7,750,000 Diversified has the following information related to two Super Soaker revenue arrangements during the first quarter of 2025. Diversified sells 30 Super Soakers to businesses in flood-prone areas for a total contract price of $54,600. In addition to the pumps, Diversified also provides installation (at a cost of $150 per pump). On a standalone basis, the fair value of this service is $200 per unit installed. The contract payment also includes a $10 per month service plan for the pumps for 3 years after installation (Diversified's cost to provide this service is $7 per month). The Super Soakers are delivered and installed on March 1, 2025, and full payment is made to Diversified. Any discount is applied to the pump/installation bundle. Diversified ships 300 Super Soakers to Menards on consignment. By March 31, 2025, Menards has sold two-thirds of the consigned merchandise at the listed price of $1,200 per unit. Menards notifies Diversified of the sales, retains a 5% commission, and remits the cash due Diversified. Accounting Determine Diversified Industries' 2025 first-quarter net income. (Ignore taxes.) Analysis Determine free cash flow (see Chapter 4) for Diversified Industries for the first quarter of 2025. In the first quarter, Diversified had depreciation expense of $175,000 and a net increase in working capital (change in accounts receivable and accounts payable) of $250,000. In the first quarter, capital expenditures were $500,000; Diversified paid dividends of $120,000. Principles Explain how the five-step revenue recognition process, when app

E17.33 (LO 5, 6) (Recognition of Profit on Long-Term Contracts)

During 2025, Nilsen Company started a construction job with a contract price of $1,600,000. The job was completed in 2027. The following information is available. 2025 2026 2027 Costs incurred to date $400,000 $825,000 $1,070,000 Estimated costs to complete 600,000 275,000 -0- Billings to date 300,000 900,000 1,600,000 Collections to date 270,000 810,000 1,425,000 Instructions Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used. Prepare all necessary journal entries for 2026. Compute the amount of gross profit to be recognized each year, assuming the cost-recovery method is used.

*BE17.25 (LO 8)

Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in four equal annual installments of $12,500 each. These installments have a present value of $41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2025, training is completed, and the store opens on July 1, 2025. Prepare the journal entries required by Frozen Delight on April 1 and July 1, 2025.

Q19.

Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers can purchase any combination of equipment, installation services, and training as part of Fuhremann's security services. Thus, each of these performance obligations are separate with individual standalone selling prices. Laplante Inc. purchased cameras, installation, and training at a total price of $80,000. Estimated standalone selling prices of the equipment, installation, and training are $90,000, $7,000, and $3,000, respectively. How should the transaction price be allocated to the equipment, installation, and training?

E17.28 (LO 4) (Existence of a Contract)

On January 1, 2025, Gordon Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for $3,000. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Gordon identifies two performance obligations and allocates $1,200 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is $700; the shelves have a cost of $320. Instructions Prepare the journal entry on January 1, 2025, for Gordon. Prepare the journal entry on February 5, 2025, for Gordon when the wiring base is delivered to the customer. Prepare the journal entry on February 25, 2025, for Gordon when the shelving unit is delivered to the customer and Gordon receives full payment.

BE17.6 (LO 2)

Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2026. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability August 1, 2026 70% August 8, 2026 20 August 15, 2026 5 After August 15, 2026 5 Determine the transaction price for this contract.

BE17.20 (LO 3)

Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a nonrefundable initiation fee of $100. No annual membership fee is charged in the first year. After the first year, membership can be renewed by paying an annual membership fee of $5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year?

E17.35 (LO 5) A textbox reads, Excel. (Gross Profit on Uncompleted Contract)

On April 1, 2025, Dougherty Inc. entered into a cost plus fixed fee contract to construct an electric generator for Altom Corporation. At the contract date, Dougherty estimated that it would take 2 years to complete the project at a cost of $2,000,000. The fixed fee stipulated in the contract is $450,000. Dougherty appropriately accounts for this contract under the percentage-of-completion method. During 2025, Dougherty incurred costs of $800,000 related to the project. The estimated cost at December 31, 2025, to complete the contract is $1,200,000. Altom was billed $600,000 under the contract. Instructions Prepare a schedule to compute the amount of gross profit to be recognized by Dougherty under the contract for the year ended December 31, 2025. Show supporting computations in good form.

E17.1 (LO 1)

(Fundamentals of Revenue Recognition) Presented below are five different situations. Provide an answer to each of these questions. The Kawaski Jeep dealership sells both new and used Jeeps. Some of the Jeeps are used for demonstration purposes; after 6 months, these Jeeps are then sold as used vehicles. Should Kawaski Jeep record these sales of used Jeeps as revenue or as a gain? One of the main indicators of whether control has passed to the customer is whether revenue has been earned. Is this statement correct? One of the five steps in determining whether revenue should be recognized is whether the sale has been realized. Do you agree? One of the criteria that contracts must meet to apply the revenue standard is that collectibility of the sales price must be reasonably possible. Is this correct? Many believe the distinction between revenue and gains is important in the financial statements. Given that both revenues and gains increase net income, why is the distinction important?

Q39.

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?

Q4.

Identify the five steps in the revenue recognition process.

E17.15 (LO 2) (Allocate Transaction Price)

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows. Oven only $ 800 Oven with installation service 850 Oven with maintenance services 975 Oven with installation and maintenance services 1,000 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800. Instructions Assume that a customer purchases an oven with both installation and maintenance services for $1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement. Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

*BE17.24 (LO 7)

Archer Construction Company began work on a $420,000 construction contract in 2025. During 2025, Archer incurred costs of $278,000, billed its customer for $215,000, and collected $175,000. At December 31, 2025, the estimated additional costs to complete the project total $162,000. Prepare Archer's journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the cost-recovery method.

E17.6 (LO 2) (Determine Transaction Price)

Bill Amends, owner of Real Estate Inc., buys and sells commercial properties. Recently, he sold land for $3,000,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the $3,000,000 sales price, Blackhawk Group agrees to pay Real Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is $1,000,000 a year. Given the substantial increase in online salesthat are occurring in the retail market, Bill had originally indicated that he would prefer a higher price for the land instead of the 1% future-sales-based arrangement and suggested a price of $3,250,000. However, Blackhawk would not agree to those terms. Instructions What is the transaction price for the land and related royalty payment that Real Estate Inc. should record?

E17.7 (LO 2) (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. Instructions Determine the transaction price of the arrangement for Blair Biotech. Assuming that regulatory approval was granted on December 20, 2025, and that Blair received the payment from Pang on January 15, 2026, prepare the journal entries for Blair. The license meetsthe criteria for point-in-time revenue recognition.

CE17.2

Briefly explain the conditions when a contract modification shall be accounted for as a separate performance obligation.

E17.27 (LO 3) (Warranties)

Celic Inc. manufactures and sells computers that include an assurance-type warranty for the first 90 days. Celic offers an optional extended coverage plan under which it will repair or replace any defective part for 3 years from the expiration of the assurance-type warranty. Because the optional extended coverage plan is sold separately, Celic determines that the 3 years of extended coverage represents a separate performance obligation. The total transaction price for the sale of a computer and the extended warranty is $3,600 on October 1, 2025, and Celic determines the standalone selling price of each is $3,200 and $400, respectively. Further, Celic estimates, based on historical experience, it will incur $200 in costs to repair defects that arise within the 90-day coverage period for the assurance-type warranty. The cost of the equipment is $1,440. Assume that the $200 in costs to repair defects in the computers occurred on October 25, 2025. Instructions Prepare the journal entry(ies) to record the October transactions related to sale of the computers. Briefly describe the accounting for the service-type warranty after the 90-day assurance-type warranty period.

E17.22 (LO 3) (Sales with Repurchase)

Cramer Corp. sells idle machinery to Enyart Company on July 1, 2025, for $40,000. Cramer agrees to repurchase this equipment from Enyart on June 30, 2026, for a price of $42,400 (an imputed interest rate of 6%). Instructions Prepare the journal entry for Cramer for the transfer of the asset to Enyart on July 1, 2025. Prepare any other necessary journal entries for Cramer in 2025. Prepare the journal entry for Cramer when the machinery is repurchased on June 30, 2026.

E17.13 (LO 2) (Allocate Transaction Price)

Crankshaft Company manufactures products ranging 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 of the equipment. Crankshaft delivers the equipment on June 1, 2025, and completes the installation of the equipment on September 30, 2025. 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. Instructions How should the transaction price of $1,000,000 be allocated among the service obligations? Prepare the journal entries for Crankshaft for this revenue arrangement on June 1, 2025 and September 30, 2025, assuming Crankshaft receives payment when installation is completed.

CT17.6 (LO 1, 2, 3) (Recognition of Revenue from Subscriptions)

Cutting Edge is a monthly magazine that has been on the market for 18 months. It currently has a circulation of 1.4 million copies. Negotiations are underway to obtain a bank loan in order to update the magazine's facilities. Cutting Edge is producing close to capacity and expects to grow at an average of 20% per year over the next 3 years. After reviewing the financial statements of Cutting Edge, Andy Rich, the bank loan officer, had indicated that a loan could be offered to Cutting Edge only if it could increase its current ratio and decrease its debt to equity ratio to a specified level. Jonathan Embry, the marketing manager of Cutting Edge, has devised a plan to meet these requirements. Embry indicates that an advertising campaign can be initiated to immediately increase circulation. The potential customers would be contacted after the purchase of another magazine's mailing list. The campaign would include: An offer to subscribe to Cutting Edge at three-fourths the normal price. A special offer to all new subscribers to receive the most current world atlas whenever requested at a guaranteed price of $2. An unconditional guarantee that any subscriber will receive a full refund if dissatisfied with the magazine. Although the offer of a full refund is risky, Embry claims that few people will ask for a refund after receiving half of their subscription issues. Embry notes that other magazine companies have tried this sales promotion technique and experienced great success. Their average cancellation rate was 25%. On average, each company increased its initial circulation threefold and in the long run increased circulation to twice that which existed before the promotion. In addition, 60% of the new subscribers are expected to take advantage of the atlas premium. Embry feels confident that the increased subscriptions from the advertising campaign will increase the current ratio and decrease the debt to equity ratio. You are the controller of Cutting Edge and must give your opinion of the proposed plan. Instructions When should revenue from the new subscriptions be recognized? How would you classify the estimated sales returns stemming from the unconditional guarantee? How should the atlas premium be recorde

P17.4 (LO 2, 3) (Allocate Transaction Price, Discounts, Time Value)

Economy Appliance Co. manufactures low-price, no-frills appliances that are in great demand for rental units. Pricing and cost information on Economy's main products are as follows. Item Standalone Selling Price (Cost) Refrigerator $500 ($260) Range 560 (275) Stackable washer/dryer unit 700 (400) Customers can contract to purchase either individually at the stated prices or a three-item bundle with a price of $1,800. The bundle price includes delivery and installation. Economy also provides installation (not a separate performance obligation). Instructions Respond to the requirements related to the following independent revenue arrangements for Economy Appliance Co. On June 1, 2025, Economy sold 100 washer/dryer units without installation to Laplante Rentals for $70,000. Laplante is a newer customer and is unsure how this product will work in its older rental units. Economy offers a 60-day return privilege and estimates, based on prior experience with sales on this product, 4% of the units will be returned. Prepare the journal entries for the sale and related cost of goods sold on June 1, 2025. YellowCard Property Managers operates upscale student apartment buildings. On May 1, 2025, Economy signs a contract with YellowCard for 300 appliance bundles to be delivered and installed in one of its new buildings. YellowCard pays 20% cash at contract signing and will pay the balance upon installation no later than August 1, 2025. Prepare journal entries for Economy on (1) May 1, 2025, and (2) August 1, 2025, when all appliances are installed. Refer to the arrangement in part (b). It would help YellowCard secure lease agreements with students if the installation of the appliance bundles can be completed by July 1, 2025. YellowCard offers a 10% bonus payment if Economy can complete installation by July 1, 2025. Economy estimates its chances of meeting the bonus deadline to be 90%, based on a number of prior contracts of similar scale. Repeat the requirement for part (b), given this bonus provision. Assume installation is completed by July 1, 2025. Epic Rentals would like to take advantage of the bundle price for its 400-unit project; on February 1, 2025, Economy signs a contract with Epic for 400

Codification Research Case

Employees at your company disagree about the accounting for sales returns. The sales manager believes that granting more generous return provisions can give the company a competitive edge and increase sales revenue. The controller cautions that, depending on the terms granted, loose return provisions might lead to non-GAAP revenue recognition. The company CFO would like you to research the issue to provide an authoritative answer. Instructions If your school has a subscription to the FASB Codification, log in and prepare responses to the following. Provide Codification references for your responses. (Provide paragraph citations.) What is the authoritative literature addressing revenue recognition when right of return exists? What is meant by "right of return"? "Bill and hold"? Describe the accounting when there is a right of return. When goods are sold on a bill-and-hold basis, what conditions must be met to recognize revenue upon receipt of the order?

Q11.

Engelhart Implements Inc. sells tractors to area farmers. The price for each tractor includes GPS positioning service for 9 months (which facilitates field settings for planting and harvesting equipment). The GPS service is regularly sold on a standalone basis by Engelhart for a monthly fee. After the 9-month period, the consumer can renew the service on a fee basis. Does Engelhart have one or multiple performance obligations? Explain.

Q25.

Explain a bill-and-hold sale. When is revenue recognized in these situations?

Q26.

Explain a principal-agent relationship and its significance to revenue recognition.

Q31.

Explain the accounting for contract modifications.

Q23.

Explain the accounting for sales with right of return.

Q1.

Explain the current environment regarding revenue recognition.

Q7.

Explain the importance of a contract in the revenue recognition process.

Q32.

Explain the reporting for costs to fulfill a contract.

CT17.5 (LO 2, 3) (Discounts)

Fahey Company sells Stairmasters to a retailer, Physical Fitness, Inc., for $2,000,000. Fahey has a history of providing price concessions on this product if the retailer has difficulty selling the Stairmasters to customers. Fahey has experience with sales like these in the past and estimates that the maximum amount of price concessions is $300,000. Instructions Determine the amount of revenue that Fahey should recognize for the sale of Stairmasters to Physical Fitness, Inc. According to GAAP, in some situations, the amount of revenue recognized may be constrained. Explain how the accounting for the Stairmasters sales might be affected by the revenue constraint due to variable consideration or returns. Some believe that revenue recognition should be constrained by collectibility. Is such a view consistent with GAAP? Explain.

Q35.

For what reasons should the percentage-of-completion method be used over the cost-recovery method whenever possible?

E17.10 (LO 2) (Allocate Transaction Price)

Geraths Windows manufactures and sells custom storm windows for three-season porches. Geraths also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Geraths enters into the following contract on July 1, 2025, with a local homeowner. The customer purchases windows for a price of $2,400 and chooses Geraths to do the installation. Geraths charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of $600. The customer pays Geraths $2,000 (which equals the standalone selling price of the windows, which have a cost of $1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2025, Geraths completes installation on October 15, 2025, and the customer pays the balance due. Prepare the journal entries for Geraths in 2025. (Round amounts to nearest dollar.)

P17.3 (LO 2, 3) (Allocate Transaction Price, Discounts, Time Value)

Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations. Instructions Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services. Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer's gas line for a total price $800. On a standalone basis, the grill sells for $700 (cost $425), and Grill Master estimates that the standalone selling price of the installation service (based on cost-plus estimation) is $150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 contracts on April 20, 2025, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2025. Prepare journal entries for Grill Master for GM205 in April and May 2025. The State of Kentucky is planning major renovations in its parks during 2025 and enters into a contract with Grill Master to purchase 400 durable, easy maintenance, standard charcoal grills during 2025. The grills are priced at $200 each (with a cost of $160 each), and Grill Master provides a 6% volume discount if Kentucky purchases at least 300 grills during 2025. On April 17, 2025, Grill Master delivered and received payment for 280 grills. Based on prior experience with the State of Kentucky renovation projects, the delivery of this many grills makes it certain that Kentucky will meet the discount threshold. Prepare the journal entries for Grill Master for grills sold on April 17, 2025. Assume the company records sales transaction net. Grill Master sells its specialty combination gas/wood-fired grills to local restaurants. Each grill is sold for $1,000 (cost $550) on credit with terms 3/30, net/90. Prepare the journal entries for the sale of 20 grills on September 1, 2025, and upon payment, assuming the customer paid on (1) September 25, 2025, and (2) October 15, 2025. Assume the company records sales net. On October 1, 2025, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local

CT17.7 (LO 2, 3) (Recognition of Revenue—Bonus Points)

Griseta & Dubel Inc. was formed early this year to sell merchandise credits to merchants, who distribute the credits free to their customers. For example, customers can earn additional credits based on the dollars they spend with a merchant (e.g., airlines and hotels). Accounts for accumulating the credits and catalogs illustrating the merchandise for which the credits may be exchanged are maintained online. Centers with inventories of merchandise premiums have been established for redemption of the credits. Merchants may not return unused credits to Griseta & Dubel. The following schedule expresses Griseta & Dubel's expectations as to the percentages of a normal month's activity that will be attained. For this purpose, a "normal month's activity" is defined as the level of operations expected when expansion of activities ceases or tapers off to a stable rate. The company expects that this level will be attained in the third year and that sales of credits will average $6,000,000 per month throughout the third year. Month Actual Credit Sales Percent Merchandise Premium Purchases Percent Credit Redemptions Percent 6th 30% 40% 10% 12th 60 60 45 18th 80 80 70 24th 90 90 80 30th 100 100 95 Griseta & Dubel plans to adopt an annual closing date at the end of each 12 months of operation. Instructions Discuss the factors to be considered in determining when revenue should be recognized. Apply the revenue recognition concepts to the Griseta & Dubel Inc. revenue arrangement. Provide balance sheet accounts that should be used and indicate how each should be classified.

*BE17.23 (LO 6)

Guillen, Inc. began work on a $7,000,000 contract in 2025 to construct an office building. Guillen uses the cost-recovery method. At December 31, 2025, the balances in certain accounts were Construction in Process $1,715,000, Accounts Receivable $240,000, and Billings on Construction in Process $1,000,000. Indicate how these accounts would be reported in Guillen's December 31, 2025, balance sheet.

P17.6 (LO 2, 3) (Warranty, Customer Loyalty Program)

Hale Hardware takes pride as the "shop around the corner" that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufacture winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches during 2025 at a total price of $21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is $16,000. The assurance warranties extend for a 3-year period with an estimated cost of $2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for $400 each. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every $10 of purchases on a select group of Hale products. Each point is redeemable for a $1 discount on any purchases of Hale merchandise in the following 2 years. During 2025, customers purchased select group products for $100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is $100,000. Based on prior experience with incentives programs like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points). Instructions Identify the separate performance obligations in the Hale warranty and bonus point programs, and briefly explain the point in time when the performance obligations are satisfied. Prepare the journal entries for Hale related to the sales of Hale winches with warranties. Prepare the journal entries for the bonus point sales for Hale in 2025. How much additional sales revenue is recognized by Hale in 2026, assuming 4,500 bo

E17.36 (LO 5, 6) (Recognition of Revenue on Long-Term Contract and Entries)

Hamilton Construction Company uses the percentage-of-completion method of accounting. In 2025, Hamilton began work under contract #E2-D2, which provided for a contract price of $2,200,000. Other details follow: 2025 2026 Costs incurred during the year $640,000 $1,425,000 Estimated costs to complete, as of December 31 960,000 -0- Billings during the year 420,000 1,680,000 Collections during the year 350,000 1,500,000 Instructions What portion of the total contract price would be recognized as revenue in 2025? In 2026? Assuming the same facts as those above except that Hamilton uses the cost-recovery method of accounting, what portion of the total contract price would be recognized as revenue in 2026? Prepare a complete set of journal entries for 2025 (using the percentage-of-completion method).

BE17.3 (LO 2)

Hillside Company enters into a contract with Sanchez Inc. to provide a software license and 3 years of customer support. The customer-support services require specialized knowledge that only Hillside Company's employees can perform. How many performance obligations are in the contract?

Q22.

How do companies recognize revenue from a performance obligation over time?

E17.34 (LO 5) (Analysis of Percentage-of-Completion Financial Statements)

In 2025, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2025, are shown below. Balance Sheet Accounts receivable $18,000 Construction in process $65,000 Less: Billings 61,500 Costs and recognized profit in excess of billings 3,500 Income Statement Income (before tax) on the contract recognized in 2025 $19,500 Instructions How much cash was collected in 2025 on this contract? What was the initial estimated total income before tax on this contract?

E17.29 (LO 4) (Contract Modification)

In September 2025, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for $15,000 ($100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional $4,275 ($95 per station). All sales are cash on delivery. Instructions Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54. Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately. Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.

Q16.

In measuring the transaction price, explain the accounting for (a) time value of money, and (b) noncash consideration.

DA17.2

Is there a correlation between unearned and earned revenue? What conclusions can we reasonably draw based on the trends of unearned revenue in the airline industry? Data visualizations can offer initial insight into relationships and identify trends over time. Required Using the same visualizations from DA17.1, you will document any correlations among the revenue data and discuss trends in unearned revenue for the airline industry. Go to Wiley Course Resources for complete details and instructions. Using Data Analytics to Estimate Sales Returns An icon displays an encircled rightward arrow pointing to a text that reads, Excel. DA17.3 Accounting systems hold a wealth of data that can unlock better estimates, management decisions, and business policies. Using analytical tools as accessible as Excel allows us to evaluate detailed transactional business data more than ever before. Required Using monthly sales and return data over a 5-year period, you will use Excel to create pivot tables and charts to evaluate trends in sales and returns data for a retail company. After creating visualizations in Excel, you will document your insights from the data. Go to Wiley Course Resources for complete details and instructions.

BE17.5 (LO 2)

Ismail Construction enters into a contract to design and build a hospital. Ismail is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing. Does Ismail have a single performance obligation to the customer in this revenue arrangement? Explain.

BE17.17 (LO 3)

Jansen Corporation shipped $20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of $2,000. Gooch Company paid $500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen's journal entry when the cash is received.

CT17.8 (LO 2, 3) A textbox reads, Ethics. (Revenue Recognition—Membership Fees)

Midwest Health Club (MHC) offers 1-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, MHC advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result of this policy, Richard Nies, corporate controller, recognized revenue ratably over the life of the membership. MHC is in the process of preparing its year-end financial statements. Rachel Avery, MHC's treasurer, is concerned about the company's lackluster performance this year. She reviews the financial statements Nies prepared and tells Nies to recognize membership revenue when the fees are received. Instructions Answer the following questions. What are the ethical issues involved? What should Nies do?

E17.5 (LO 2) (Determine Transaction Price)

Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for $200,000. In addition, as part of the contract, a performance bonus of $40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late. Instructions Determine the transaction price that Concrete Always should compute for this agreement. Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

CT17.2 (LO 1, 2, 3) (Satisfying Performance Obligations)

Judy Schaeffer is getting up to speed on the new guidance on revenue recognition. She is trying to understand the revenue recognition principle as it relates to the five-step revenue recognition process. Instructions Describe the revenue recognition principle. Briefly discuss how the revenue recognition principle relates to the definitions of assets and liabilities. What is the importance of control? Judy recalls that previous revenue recognition guidance required that revenue not be recognized unless the revenue was realized or realizable (also referred to as collectibility). Is collectibility a consideration in the recognition of revenue? Explain.

E17.4 (LO 2) (Determine Transaction Price)

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2025. The goods have a sales price of $610,000 (cost of $500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2025, Danone makes payment to Jupiter for the full sales price. Instructions Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2025, and the payment on January 28, 2025. Assume that Jupiter Company records the January 2, 2025, transaction using the net method. Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2025, and the payment on January 28, 2025. Assume that Jupiter Company records the January 2, 2025, transaction using the gross method.

BE17.14 (LO 3)

Kristin Company sells 300 units of its products for $20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is $12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

BE17.11 (LO 2, 3)

Larkspur Inc. sells prepaid telephone cards to customers in its convenience stores. When Larkspur sells cards, it then pays the telecommunications company, TeleExpress, for the value of the cards less a 20% commission. Assume that Larkspur receives $4,000 of prepaid cards in January 2025. Larkspur sold 50% of the cards in February, 30% in March, and 20% in April. The total payment by Larkspur to TeleExpress over the 3 months is $3,200. Indicate how much income Larkspur should recognize in January, February, March, and April.

BE17.1 (LO 1)

Leno Computers manufactures tablet computers for sale to retailers such as Fallon Electronics. Recently, Leno sold and delivered 200 tablet computers to Fallon for $20,000 on January 5, 2025. Fallon has agreed to pay for the 200 tablet computers within 30 days. Fallon has a good credit rating and should have no difficulty in making payment to Leno. (a) Explain whether a valid contract exists between Leno Computers and Fallon Electronics. (b) Assuming that Leno Computers has not yet delivered the tablet computers to Fallon Electronics, what might cause a valid contract not to exist between Leno and Fallon?

BE17.12 (LO 2, 3)

Manual Company sells goods to Nolan Company during 2025. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?

P17.7 (LO 2) (Customer Loyalty Program)

Martz Inc. has a customer loyalty program that rewards a customer with 1 customer loyalty point for every $10 of purchases. Each point is redeemable for a $3 discount on any future purchases. On July 2, 2025, customers purchase products for $300,000 (with a cost of $171,000) and earn 30,000 points redeemable for future purchases. Martz expects 25,000 points to be redeemed. Martz estimates a standalone selling price of $2.50 per point (or $75,000 total) on the basis of the likelihood of redemption. The points provide a material right to customers that they would not receive without entering into a contract. As a result, Martz concludes that the points are a separate performance obligation. Instructions Determine the transaction price for the product and the customer loyalty points. Prepare the journal entries to record the sale of the product and related points on July 2, 2025. At the end of the first reporting period (July 31, 2025), 10,000 loyalty points are redeemed. Martz continues to expect 25,000 loyalty points to be redeemed in total. Determine the amount of loyalty point revenue to be recognized at July 31, 2025.

E17.39 (LO 8) (Franchise Fee, Initial Down Payment)

On January 1, 2025, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of $50,000. The amount of $10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2026. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2025. Lesley Benjamin's credit rating indicates that she can borrow money at 11% for a loan of this type. Instructions Prepare journal entries for Campbell for 2025-related revenue for this franchise arrangement. Prepare journal entries for Campbell for 2025-related revenue for this franchise arrangement, assuming that in addition to the franchise rights, Campbell also provides 1 year of operational consulting and training services, beginning on the signing date. These services have a value of $3,600. Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

BE17.9 (LO 2)

On January 2, 2025, Adani Inc. sells goods to Geo Company in exchange for a zero-interest-bearing note with face value of $11,000, with payment due in 12 months. The fair value of the goods at the date of sale is $10,000 (cost $6,000). Prepare the journal entry to record this transaction on January 2, 2025. How much total revenue should be recognized in 2025?

E17.26 (LO 3) (Warranty Arrangement)

On January 2, 2025, 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, 2025. During 2025, Grando incurs costs related to warranties of $900. At December 31, 2025, Grando estimates that $650 of warranty costs will be incurred in the second year of the warranty. Instructions Prepare the journal entry to record this transaction on January 2, 2025, and on December 31, 2025 (assuming financial statements are prepared on December 31, 2025). Repeat the requirements for (a), assuming that in addition to the assurance warranty, Grando sold Fargo an extended warranty (service-type warranty) for an additional 2 years (2027-2028) for $800.

P17.11 (LO 5, 6, 7) A textbox reads, Excel. (Long-Term Contract with an Overall Loss)

On July 1, 2025, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2027, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2025, 2026, and 2027. At 12/31/25 At 12/31/26 At 12/31/27 Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000 Estimated costs to complete the contract 1,200,000 800,000 -0- Billings to Gumbel 300,000 1,100,000 1,850,000 Instructions Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2025, 2026, and 2027. (Ignore income taxes.) Using the cost-recovery method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2025, 2026, and 2027. (Ignore income taxes.)

BE17.13 (LO 3)

On July 10, 2025, Amodt Music sold CDs to retailers on account and recorded sales revenue of $700,000 (cost $560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2025, retailers returned CDs to Amodt and were granted credit of $78,000. Prepare Amodt's journal entries to record (a) the sale on July 10, 2025, and (b) $78,000 of returns on October 11, 2025, and on October 31, 2025. Assume that Amodt prepares financial statements on October 31, 2025.

BE17.15 (LO 3)

On June 1, 2025, Mills Company sells $200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2025, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that conditions for recognizing the sale as a bill-and-hold sale have been met) for Mills on June 1 and September 1, 2025. The cost of the shelving units to Mills is $110,000.

E17.19 (LO 3) A textbox reads, Excel. (Sales with Returns)

On June 3, 2025, Hunt Company sold to Ann Mount merchandise having a sales price of $8,000 (cost $6,000) with terms of n/60, f.o.b. shipping point. Hunt estimates that merchandise with a sales value of $800 will be returned. An invoice totaling $120 was received by Mount on June 8 from Olympic Transport Service for the freight cost. Upon receipt ofthe goods, on June 8, Mount returned to Hunt $300 of merchandise containing flaws. Hunt estimates thereturned items are expected to be resold at a profit. The freight on the returned merchandise was $24, paid by Hunt on June 8. On July 16, the company received a check for the balance due from Mount. Instructions Prepare journal entries for Hunt Company to record all the events in June and July.

BE17.10 (LO 2)

On March 1, 2025, Parnevik Company sold goods to Goosen Inc. for $660,000 in exchange for a 5-year, zero-interest-bearing note in the face amount of $1,062,937 (an inputed rate of 10%). The goods have an inventory cost on Parnevik's books of $400,000. Prepare the journal entries for Parnevik on (a) March 1, 2025, and (b) December 31, 2025.

P17.10 (LO 5, 6, 7) (Long-Term Contract with Interim Loss)

On March 1, 2025, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,400,000. The building was completed by October 31, 2027. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2025, 2026, and 2027 are given below. 2025 2026 2027 Contract costs incurred during the year $2,880,000 $2,230,000 $2,190,000 Estimated costs to complete the contract at 12/31 3,520,000 2,190,000 -0- Billings to Fabrik during the year 3,200,000 3,500,000 1,700,000 Instructions Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2025, 2026, and 2027. (Ignore income taxes.) Using the cost-recovery method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2025, 2026, and 2027. (Ignore incomes taxes.)

E17.16 (LO 3) A textbox reads, Excel. (Sales with Returns)

On March 10, 2025, Steele Company sold to Barr Hardware 200 tool sets at a price of $50 each (cost $30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2025, Barr returned six tool sets and received a credit to its account. Instructions Prepare journal entries for Steele to record (1) the sale on March 10, 2025, (2) the return on March 25, 2025, and (c) any adjusting entries required on March 31, 2025 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct. Indicate the income statement and balance sheet reporting by Steele at March 31, 2025, of the information related to the Barr sales transaction.

BE17.19 (LO 3)

On May 1, 2025, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2025. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2025. Eric pays on June 15, 2025, and Mount delivers the product on September 30, 2025. Prepare the journal entries required for Mount in 2025.

E17.3 (LO 1, 2) (Existence of a Contract)

On May 1, 2025, Richardson Inc. entered into a contract to deliver one of its specialty mowers to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $900 in advance on May 15, 2025. Kickapoo pays Richardson on May 15, 2025, and Richardson delivers the mower (with cost of $575) on May 31, 2025. Instructions Prepare the journal entry on May 1, 2025, for Richardson. Prepare the journal entry on May 15, 2025, for Richardson. Prepare the journal entry on May 31, 2025, for Richardson.

BE17.2 (LO 1)

On May 10, 2025, Cosmo Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2025. Greig agrees to pay the full contract price of $2,000 on July 15, 2025. The cost of the goods is $1,300. Cosmo delivers the product to Greig on June 15, 2025, and receives payment on July 15, 2025. Prepare the journal entries for Cosmo related to this contract. Either party may terminate the contract without compensation until one of the parties performs.

E17.25 (LO 3) (Consignment Sales)

On May 3, 2025, Eisler Company consigned 80 freezers, costing $500 each, to Remmers Company. The cost of shipping the freezers amounted to $840 and was paid by Eisler Company. On December 30, 2025, a report was received from the consignee, indicating that 40 freezers had been sold for $750 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of $200, and total installation costs of $320 on the freezers sold. Instructions Compute the inventory value of the units unsold in the hands of the consignee. Compute the profit for the consignor for the units sold. Compute the amount of cash that will be remitted by the consignee.

Q8.

On October 10, 2025, Executor Co. entered into a contract with Belisle Inc. to transfer Executor's specialty products (sales value of $10,000, cost of $6,500) on December 15, 2025. Belisle agrees to make a payment of $5,000 upon delivery and signs a promissory note to pay the remaining balance on January 15, 2026. What entries does Executor make in 2025 on this contract? Ignore time value of money considerations.

E17.18 (LO 3) A textbox reads, Excel. (Sales with Allowances)

On October 2, 2025, Laplante Company sold $6,000 of its elite camping gear (with a cost of $3,600) to Lynch Outfitters. As part of the sales agreement, Laplante includes a provision that if Lynch is dissatisfied with the product, Laplante will grant an allowance on the sales price or agree to take the product back (although returns are rare, given the long-term relationship between Laplante and Lynch). Lynch expects total allowances to Lynch to be $800. On October 16, 2025, Laplante grants an allowance of $400 to Lynch because the color for some of the items delivered was a bit different than what appeared in the catalog. Instructions Prepare journal entries for Laplante to record (1) the sale on October 2, 2025, (2) the granting of the allowance on October 16, 2025, and, (c) any adjusting required on October 31, 2025 (when Laplante prepares financial statements). Laplante now estimates additional allowances of $250 will be granted to Lynch in the future. Indicate the income statement and balance sheet reporting by Laplante at October 31, 2025, of the information related to the Lynch transaction.

Q18.

On what basis should the transaction price be allocated to various performance obligations? Identify the approaches for allocating the transaction price.

E17.20 (LO 3) (Sales with Returns)

Organic Growth Company is presently testing a number of new agricultural seed planters that it has recently developed. To stimulate interest, it has decided to grant to five of its largest customers the unconditional right of return of these products if not fully satisfied. The right of return extends for 4 months. Organic Growth estimates returns of 20%. Organic Growth sells these planters on account for $1,500,000 (cost $750,000) on January 2, 2025. Customers are required to pay the full amount due by March 15, 2025. Instructions Prepare the journal entry for Organic Growth at January 2, 2025. Assume that one customer returns planters on March 1, 2025, due to unsatisfactory performance. Prepare the journal entry to record this transaction, assuming this customer purchased $100,000 of planters from Organic Growth. Assume Organic Growth prepares financial statements quarterly. Prepare the necessary entries (if any) to adjust Organic Growth's financial results for the above transactions on March 31, 2025, assuming remaining expected returns of $200,000.

E17.38 (LO 8) (Franchise Entries)

Pacific Crossburgers Inc. charges an initial franchise fee of $70,000. Upon the signing of the agreement (which covers 3 years after commencement of operations), a payment of $28,000 is due. Thereafter, three annual payments of $14,000 are required. The credit rating of the franchisee is such that it would have to pay interest at 10% to borrow money. The franchise agreement is signed on May 1, 2025, and the franchise commences operation on July 1, 2025. Instructions Prepare the journal entries in 2025 for the franchisor under the following assumptions. (Round to the nearest dollar.) No future services are required by the franchisor once the franchise starts operations. The franchisor has substantial services to perform, once the franchise begins operations, to maintain the value of the franchise. The total franchise fee includes training services (with a value of $2,400) for the period leading up to the franchise opening and for 2 months following opening.

BE17.8 (LO 2)

Presented below are three revenue recognition situations. Groupo sells goods to MTN for $1,000,000, payment due at delivery. Groupo sells goods on account to Grifols for $800,000, payment due in 30 days. Groupo sells goods to Magnus for $500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is $464,000. Indicate the transaction price for each of these situations and when revenue will be recognized.

P17.8 (LO 2) (Time Value, Gift Cards, Discounts)

Presented below are two independent revenue arrangements for Colbert Company. Instructions Respond to the requirements related to each revenue arrangement. Colbert sells 3D printer systems. Recently, Colbert provided a special promotion of zero-interest financing for 2 years on any new 3D printer system. Assume that Colbert sells Lyle Cartright a 3D system, receiving a $5,000 zero-interest-bearing note on January 1, 2025. The cost of the 3D printer system is $4,000. Colbert imputes a 6% interest rate on this zero-interest note transaction. Prepare the journal entry to record the sale on January 1, 2025, and compute the total amount of revenue to be recognized in 2025. Colbert sells 20 nonrefundable $100 gift cards for 3D printer paper on March 1, 2025. The paper has a standalone selling price of $100 (cost $80). The gift cards expiration date is June 30, 2025. Colbert estimates that customers will not redeem 10% of these gift cards (breakage). The pattern of redemption is as follows. Redemption Total March 31 50% April 30 80 June 30 85 Prepare the 2025 journal entries related to the gift cards at March 1, March 31, April 30, and June 30. Colbert recognizes breakage when cards expire (June 30).

P17.2 (LO 2, 3, 4) (Allocate Transaction Price, Modification of Contract)

Refer to the Tablet Bundle A revenue arrangement in P17.1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer. Instructions Prepare the journal entries when the contract is signed on January 2, 2027, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation. Prepare the journal entries on December 31, 2027, for the 40 extended contracts (the first year of the revised 3-year contract).

E17.32 (LO 4) (Contract Costs, Collectibility)

Refer to the information in E17.31. Instructions Does the accounting for capitalized costs change if the contract is for 1 year rather than 3 years? Explain. Dan's Demolition is a startup company; as a result, there is more than insignificant uncertainty about Dan's ability to make the 6-month payments on time. Does this uncertainty affect the amount of revenue to be recognized under the contract? Explain.

Q15.

Refer to the information in Question 14. Assume that Allee has limited experience with a construction project on the same scale as the 10 speedboats. How does this affect the accounting for the variable consideration?

E17.11 (LO 2) (Allocate Transaction Price)

Refer to the revenue arrangement in E17.10. Repeat the requirements, assuming (a) Geraths estimates the standalone selling price of the installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the standalone selling price of the installation. (Round amounts to nearest dollar.)

E17.14 (LO 2) (Allocate Transaction Price)

Refer to the revenue arrangement in E17.13. Instructions Repeat requirements (a) and (b) assuming Crankshaft 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 $36,000; Crankshaft prices these services with a 25% margin relative to cost.

E17.17 (LO 3) A textbox reads, Excel. (Sales with Returns)

Refer to the revenue arrangement in E17.16. Assume that instead of selling the tool sets on credit, that Steele sold them for cash. Instructions Prepare journal entries for Steele to record (1) the sale on March 10, 2025, (2) the return on March 25, 2025, and (c) any adjusting entries required on March 31, 2025 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct. Indicate the income statement and balance sheet reporting by Steele at March 31, 2025, of the information related to the Barr sale.

BE17.7 (LO 2)

Referring to the revenue arrangement in BE17.6, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2026, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2026), and (b) Nair has limited information with which to develop a reliable estimate of completion by the August 1, 2026, deadline.

E17.2 (LO 1) (Fundamentals of Revenue Recognition)

Respond to the questions related to the following statements. A wholly unperformed contract is one in which the company has neither transferred the promised goods or services to the customer nor received, or become entitled to receive, any consideration. Why are these contracts not recorded in the accounts? Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. Is this statement correct? Elaina Company contracts with a customer and provides the customer with an option to purchase additional goods for free or at a discount. Should Elaina Company account for this option? The transaction price is generally not adjusted to reflect the customer's credit risk, meaning the risk that the customer will not pay the amount to which the entity is entitled to under the contract. Comment on this statement.

CT17.1 (LO 2, 3) (Five-Step Revenue Process)

Revenue is recognized based on a five-step process that is applied to a company's revenue arrangements. Instructions Briefly describe the five-step process. Explain the importance of contracts when analyzing revenue arrangements. How are fair value measurement concepts applied in implementation of the five-step process? How does the five-step process reflect application of the definitions of assets and liabilities?

CT17.4 (LO 1, 2, 3) (Recognition of Revenue—Theory)

Revenue is recognized for accounting purposes when a performance obligation is satisfied. In some situations, revenue is recognized over time as the fair values of assets and liabilities change. In other situations, however, accountants have developed guidelines for recognizing revenue at the point of sale. Instructions (Ignore income taxes.) Explain and justify why revenue is often recognized at time of sale. Explain in what situations it would be appropriate to recognize revenue over time.

CT17.3 (LO 1, 2, 3) (Recognition of Revenue—Theory)

Revenue is usually recognized at the point of sale (a point in time). Under special circumstances, however, bases other than the point of sale are used for the timing of revenue recognition. Instructions Why is the point of sale usually used as the basis for the timing of revenue recognition? Disregarding the special circumstances when bases other than the point of sale are used, discuss the merits of each of the following objections to the point-of-sale basis of revenue recognition: It is too conservative because revenue is earned throughout the entire process of production. It is not conservative enough because accounts receivable do not represent disposable funds, sales returns and allowances may be made, and collection and bad debt expenses may be incurred in a later period. Revenue may also be recognized over time. Give an example of the circumstances in which revenue is recognized over time and the accounting merits of its use instead of the point-of-sale basis.

E17.31 (LO 4) (Contract Costs)

Rex's Reclaimers entered into a contract with Dan's Demolition to manage the processing of recycled materials on Dan's various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex's incurs selling commission costs of $2,000 to obtain the contract. Before performing the services, Rex's also designs and builds receptacles and loading equipment that interfaces with Dan's demolition equipment at a cost of $27,000. These receptacles and equipment are retained by Rex's and can be used for other projects. Dan's promises to pay a fixed fee of $12,000 per year, payable every 6 months for the services under the contract. Rex's incurs the following costs: design services for the receptacles to interface with Dan's equipment $3,000, loading equipment controllers $6,000, and special testing and OSHA inspection fees $2,000 (some of Dan's projects are on government property). Instructions Determine the costs that should be capitalized as part of Rex's Reclaimers revenue arrangement with Dan's Demolition. Dan's also expects to incur general and administrative costs related to this contract, as well as costs of wasted materials and labor that likely cannot be factored into the contract price. Can these costs be capitalized? Explain.

P17.5 (LO 2, 3) (Allocate Transaction Price, Returns, and Consignments)

Ritt Ranch & Farm 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 Ritt's products. Pricing and cost information on three of Ritt's most popular products are as follows. Item Standalone Selling Price (Cost) Mini-trencher $ 3,600 ($2,000) Power fence hole auger 1,200 (800) Grain/hay dryer 14,000 (11,000) Instructions Respond to the requirements related to the following independent revenue arrangements for Ritt Ranch & Farm. On January 1, 2025, Ritt sells 40 augers to Mills Farm & Fleet for $48,000. Mills signs a 6-month note at an annual interest rate of 12%. Ritt allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Ritt estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Ritt'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 Ritt on January 1, 2025. On August 10, 2025, Ritt sells 16 mini-trenchers to a farm co-op in western Minnesota on account. Ritt provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Ritt 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 Ritt on August 10, 2025. Ritt sells three grain/hay dryers to a local farmer at a total contract price of $45,200. In addition to the dryers, Ritt provides installation, which has a standalone selling price of $1,000 per unit installed. The contract payment also includes a $1,200 maintenance plan for the dryers for 3 years after installation. Ritt signs the contract on June 20, 2025, and receives a 20% down payment from the farmer. The dryers are delivered and installed on October 1, 2025, and full payment is made to Ritt. Prepare the journal entries for Ritt in

UYJ17.1

The financial statements of P&G are presented in Appendix B. The company's complete annual report, including the notes to the financial statements, is available online. Instructions Refer to P&G's financial statements and the accompanying notes to answer the following questions. What were P&G's net sales for 2020? What was the percentage of increase or decrease in P&G's net sales from 2019 to 2020? From 2018 to 2019? In its notes to the financial statements, what criteria does P&G use to recognize revenue? How does P&G account for trade promotions? Does the accounting conform to accrual accounting concepts? Explain.

P17.9 (LO 5, 6) A textbox reads, Excel. (Recognition of Profit on Long-Term Contract)

Shanahan Construction Company has entered into a contract beginning January 1, 2025, to build a parking complex. It has been estimated that the complex will cost $600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to the construction period. 2025 2026 2027 Costs to date $270,000 $450,000 $610,000 Estimated costs to complete 330,000 150,000 -0- Progress billings to date 270,000 550,000 900,000 Cash collected to date 240,000 500,000 900,000 Instructions Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period. Using the cost-recovery method, compute the estimated gross profit that would be recognized during each year of the construction period.

E17.12 (LO 2) (Allocate Transaction Price)

Shaw Company sells goods on credit that cost $300,000 to Ricard Company for $410,000 on January 2, 2025. 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. Instructions Prepare the journal entries (if any) to record the sale on January 2, 2025. Shaw prepares an income statement for the first quarter of 2025, ending on March 31, 2025 (installation was completed on June 18, 2025). How much revenue should Shaw recognize related to its sale to Ricard?

BE17.21 (LO 4)

Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay $100,000 at the beginning of each year (the standalone selling price of the service at contract inception is $100,000 per year). At the end of the second year, the contract is modified and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to $80,000 (the standalone selling price of the services at the beginning of the third year is $80,000 per year). Briefly describe the accounting for this contract modification.

P17.1 (LO 2, 3) (Allocate Transaction Price, Upfront Fees)

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is $500. The standalone selling price of the tablet is $250 (the cost to Tablet Tailors is $175). Tablet Tailors sells the Internet access service independently for an upfront payment of $300. On January 2, 2025, Tablet Tailors signed 100 contracts, receiving a total of $50,000 in cash. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for $600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of $150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2025, receiving a total of $120,000 in cash. Instructions Prepare any journal entries to record the revenue arrangement for Tablet Bundle A on January 2, 2025, and December 31, 2025. Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2025, and December 31, 2025. Repeat the requirements for part (a), assuming that Tablet Tailors has no reliable data with which to estimate the standalone selling price for the Internet service.

BE17.18 (LO 3)

Talarczyk Company sold 10,000 Super-Spreaders on December 31, 2025, at a total price of $1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is $550,000. The assurance warranties extend for a 2-year period and are estimated to cost $40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for $12,000. Given this information, determine the amounts to report for the following at December 31, 2025: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash.

E17.9 (LO 2, 3) (Determine Transaction Price)

Taylor Marina has 300 available slips that rent for $800 per season. Payments must be made in full by the start of the boating season, April 1, 2026. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by December 31, 2026. Under a new policy, if payment for 2027 season slips is made by December 31, 2026, a 5% discount is allowed. If payment for 2028 season slips is made by December 31, 2026, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs). On December 31, 2025, all 300 slips for the 2026 season were rented at full price. On December 31, 2026, 200 slips were reserved and paid for the 2027 boating season, and 60 slips were reserved and paid for the 2028 boating season. Instructions Prepare the appropriate journal entries for December 31, 2025, and December 31, 2026. Assume the marina operator is unsophisticated in business. Explain the managerial significance of the above accounting to this person.

UYJ17.2

The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies' complete annual reports, including the notes to the financial statements, are available online. Instructions Use the companies' financial information to answer the following questions. What were Coca-Cola's and PepsiCo's net revenues (sales) for the year 2020? Which company increased its revenue more (dollars and percentage) from 2019 to 2020? Are the revenue recognition policies of Coca-Cola and PepsiCo similar? Explain. In which foreign countries (geographic areas) did Coca-Cola and PepsiCo experience significant revenues in 2020? Compare the amounts of foreign revenues to U.S. revenues for both Coca-Cola and PepsiCo.

UYJ17.3

The following note appears in the "Summary of Significant Accounting Policies" section of the Annual Report of Westinghouse Electric Corporation. Note 1 (in part): Revenue Recognition. Sales are primarily recorded as products are shipped and services are rendered. The percentage-of-completion method of accounting is used for nuclear steam supply system orders with delivery schedules generally in excess of five years and for certain construction projects where this method of accounting is consistent with industry practice. WFSI revenues are generally recognized on the accrual method. When accounts become delinquent for more than two payment periods, usually 60 days, income is recognized only as payments are received. Such delinquent accounts for which no payments are received in the current month, and other accounts on which income is not being recognized because the receipt of either principal or interest is questionable, are classified as nonearning receivables. Instructions Identify the revenue recognition methods used by Westinghouse Electric as discussed in its note on significant accounting policies. Under what conditions are the revenue recognition methods identified in the first paragraph of Westinghouse's note above acceptable? From the information provided in the second paragraph of Westinghouse's note, identify the type of operation being described and defend the acceptability of the revenue recognition method.

BE17.16 (LO 3)

Travel 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 $70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits $65,800 to ShipAway. Prepare the journal entry to record (1) the receipt of payment of $70,000 from employees for the cruise packages and (2) the remittance and revenue recognized by Travel Inc. on this transaction.

*BE17.22 (LO 5)

Turner, Inc. began work on a $7,000,000 contract in 2025 to construct an office building. During 2025, Turner, Inc. incurred costs of $1,700,000, billed its customers for $1,200,000, and collected $960,000. At December 31, 2025, the estimated additional costs to complete the project total $3,300,000. Prepare Turner's 2025 journal entries using the percentage-of-completion method.

E17.30 (LO 4) (Contract Modification)

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2025, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,000. In addition, Walleye agrees to pay an additional $20,000 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 the first 2 years of the contract. Instructions Prepare the journal entries for Tyler in 2025 and 2026 related to this service contract. Prepare the journal entries for Tyler in 2027 related to the modified service contract, assuming a prospective approach. Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

E17.21 (LO 3) (Sales with Returns)

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 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 normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit. Instructions Identify the revenue recognition criteria that Uddin could employ concerning textbook sales. Briefly discuss the reasoning for your answers in (a) above. On July 1, 2025, Uddin shipped books invoiced at $15,000,000 (cost $12,000,000). Prepare the journal entry to record this transaction. On October 3, 2025, $1.5 million of the invoiced July sales were returned according to the return policy, and the remaining $13.5 million was paid. Prepare the journal entries for the return and payment. Assume Uddin prepares financial statements on October 31, 2025, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.

Q21.

Under what conditions does a company recognize revenue over a period of time?

DA17.1

Using financial statement data to benchmark results against other companies in the same industry is important for any company but especially relevant for new companies. Benchmarking industry-specific data allows new companies to evaluate their performance against more established organizations and can help provide timely feedback on initial policies and business practices. Data visualizations bring together data from different financial statements, enhancing the insights we can gain from the information. For example, the following chart shows the ratio of unearned revenue to total earned revenue for several companies in the airline industry. Unearned revenue represents a significant liability for most airline companies, and this visualization can help management understand the relationship of that liability to future revenues. A vertical bar graph is titled, Unearned Revenue to Total Revenue. The vertical axis labeled, Ratio, ranges from 0.0 to 0.4, in increments of 0.1. The horizontal axis ranges from left to right as follows: American Airlines, Delta Airlines, United Airlines, Southwest Airlines, Alaskan Airlines, JetBlue Airways. Each airline is sub-divided into four years as follows: 2015, 2016, 2017, and 2018. A line is plotted for each airline for the years 2015 through 2018 as follows: American Airlines: (2015, 0.13); (2016, 0.13); (2017, 0.13); (2018, 0.27). Delta Airlines: (2015, 0.24); (2016, 0.24); (2017, 0.27); (2018, 0.29). United Airlines: (2015, 0.29); (2016, 0.27); (2017, 0.27); (2018, 0.26). Southwest Airlines: (2015, 0.19); (2016, 0.18); (2017, 0.18); (2018, 0.26). Alaskan Airlines: (2015, 0.22); (2016, 0.30); (2017, 0.24); (2018, 0.38). JetBlue Airways: (2015, 0.23); (2016, 0.20); (2017, 0.20); (2018, 0.23). Required For this exercise, you will use data visualizations to answer several questions about the relationship between unearned and earned revenue for companies in the airline industry. Go to Wiley Course Resources for complete details and instructions.

Q13.

What are some examples of variable consideration? What are the two approaches for estimating variable consideration?

Q24.

What are the reporting issues in a sale with a repurchase agreement?

Q34.

What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.

Q37.

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?

Q28.

What are the two types of warranties? Explain the accounting for each type.

Q9.

What is a performance obligation? Under what conditions does a performance obligation exist?

Q27.

What is the nature of a sale on consignment?

Q17.

What is the proper accounting for volume discounts on sales of products?

Q12.

What is the transaction price? What additional factors related to the transaction price must be considered in determining the transaction price?

Q36.

What methods are used in practice to determine the extent of progress toward completion? Identify some "input measures" and some "output measures" that might be used to determine the extent of progress.

CE17.4

What procedures are followed in the allocation of a discount?

Q33.

What qualitative and quantitative disclosures are required related to revenue recognition?

Q2.

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

Q20.

When does a company satisfy a performance obligation? Identify the indicators of satisfaction of a performance obligation.

Q6.

When is revenue recognized in the following situations? (a) Revenue from selling products, (b) revenue from services performed, (c) revenue from permitting others to use company assets, and (d) revenue from disposing of assets other than products.

Q10.

When must multiple performance obligations in a revenue arrangement be accounted for separately?

Q38.

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

CT17.9 (LO 5) A textbox reads, Writing. (Long-Term Contract—Percentage-of-Completion)

Widjaja Company is accounting for a long-term construction contract using the percentage-of-completion method. It is a 4-year contract that is currently in its second year. The latest estimates of total contract costs indicate that the contract will be completed at a profit to Widjaja Company. Instructions What theoretical justification is there for Widjaja Company's use of the percentage-of-completion method? How would progress billings be accounted for? Include in your discussion the classification of progress billings in Widjaja Company financial statements. How would the income recognized in the second year of the 4-year contract be determined using the cost-to-cost method of determining percentage of completion? What would be the effect on earnings per share in the second year of the 4-year contract of using the percentage-of-completion method instead of the cost-recovery method? Discuss.

E17.24 (LO 3) (Bill and Hold)

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay $2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of $300,000. Instructions Explain this type of revenue recognition transaction. What factors should be considered in determining when to recognize revenue in this transaction? Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

E17.37 (LO 5, 6) (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts)

Yanmei Construction Company began operations on January 1, 2025. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the facility is $6,000,000. During the year, Yanmei incurred $1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is $4,204,200. Lundquist Corp. was billed and paid 25% of the contract price. Instructions Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2025, and the amount to be shown as "costs and recognized profit in excess of billings" or "billings in excess of costs and recognized profit" at December 31, 2025, under each of the following methods. Show supporting computations in good form. Cost-recovery method. Percentage-of-completion method.

E17.23 (LO 3) (Repurchase Agreement)

Zagat Inc. enters into an agreement on March 1, 2025, to sell Werner Metal Company aluminum ingots. As part of the agreement, Zagat also agrees to repurchase the ingots on May 1, 2025, at the original sales price of $200,000 plus 2%. Instructions Prepare Zagat's journal entry necessary on March 1, 2025. Prepare Zagat's journal entry for the repurchase of the ingots on May 1, 2025.