A consulting firm enters into a contract to help a small family owned business design a marketing strategy to compete with other companies in the region.  THe contract spans 8 months.  Baker's client promises to pay $93,000 at the begining of each month.  At the end of the contract, Baker either will give their client a refund of $31,000 or will be entitled to an additonal $31,000 bonus, depending on whether sales at Burger boy at year end have increased to a target level.  At the inception of the contract, Baker estimated an 80% chance that it will earn the $31,000 bonus and calculates the contract price based on the expected value of future payments to be received.  At the end of the contract, Baker received the additional consideration of $31,000.00#1.  Prepare journal entry to record revenue for the first four month of the contract.#2.  Prepare the journal entry that "Baker would record after 8 months to record the receipt of the $31,000 bonus.For #1 I'm not sure if I use Accounts Receivable or Cash, that's my question.I debit one of those for 372,000 and debit bonus receivable for 9,300 and credit service revenue for 381,300#2 Again I'm not sure if it's accounts receivable or cash, but I'm thinking cash debit 31,000, bonus receivable 18,600 credit and credit revenus 12,400.My questions are not in the calculations, but whether to use A/R or cash.  I think on number 1 it is A/R and #2 it is Cash.  But I'm not sure.

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Asked Oct 24, 2019
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A consulting firm enters into a contract to help a small family owned business design a marketing strategy to compete with other companies in the region.  THe contract spans 8 months.  Baker's client promises to pay $93,000 at the begining of each month.  At the end of the contract, Baker either will give their client a refund of $31,000 or will be entitled to an additonal $31,000 bonus, depending on whether sales at Burger boy at year end have increased to a target level.  At the inception of the contract, Baker estimated an 80% chance that it will earn the $31,000 bonus and calculates the contract price based on the expected value of future payments to be received.  At the end of the contract, Baker received the additional consideration of $31,000.00

#1.  Prepare journal entry to record revenue for the first four month of the contract.

#2.  Prepare the journal entry that "Baker would record after 8 months to record the receipt of the $31,000 bonus.

For #1 I'm not sure if I use Accounts Receivable or Cash, that's my question.

I debit one of those for 372,000 and debit bonus receivable for 9,300 and credit service revenue for 381,300

#2 Again I'm not sure if it's accounts receivable or cash, but I'm thinking cash debit 31,000, bonus receivable 18,600 credit and credit revenus 12,400.

My questions are not in the calculations, but whether to use A/R or cash.  I think on number 1 it is A/R and #2 it is Cash.  But I'm not sure.

 

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Expected Probabilities (1) Possible Prices consideration ($93,000 x 8) $31,000 S775,000 (S93,000x 8) - $31,000 = S713,000 Transaction price at contract inception 80% 20% $620,000 $142,600 $762,600 Per month revemue ($762,600 / 8 months) amount promised to pay expected bonus 95250 93000 2250 Accounts title and Explanation Accounts receivable Expected Bonus receivable Debit (S) Credit (S) Date $93,000 S2,250 Revenue $95,250 (To record the monthly revenue recognized)

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