An entity sells a product to a customer for P121 that is payable 24 months after delivery. The customer obtains control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new and the entity has no relevant historical evidence of product returns or other available market evidence. The cash selling price of the product is P100, which represents the amount that the customer would pay upon delivery for the same product sold under otherwise identical terms and conditions as at contract inception. The entity's cost of the product is P80. The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. The contract includes an implicit interest rate of 10 per cent (i.e., the interest rate that over 24 months discounts the promised consideration of P121 to the cash selling price of P100). The entity evaluates the rate and concludes that it is commensurate with the rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception.

An entity sells a product to a customer for P121 that is payable 24 months after delivery. The customer obtains control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new and the entity has no relevant historical evidence of product returns or other available market evidence. The cash selling price of the product is P100, which represents the amount that the customer would pay upon delivery for the same product sold under otherwise identical terms and conditions as at contract inception. The entity's cost of the product is P80. The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. The contract includes an implicit interest rate of 10 per cent (i.e., the interest rate that over 24 months discounts the promised consideration of P121 to the cash selling price of P100). The entity evaluates the rate and concludes that it is commensurate with the rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 15E: On January 1, 2019, Piper Company entered into an agreement with Save-Mart to sell its most popular...

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On January 1, 2019, Mopps Corp. agrees to provide Conklin Company 3 years of cleaning and janitorial services. The contract sets the price at 12,000 per year, which is the normal standalone price that Mopps charges. On December 31, 2020, Mopps and Conklin agree to modify the contract. Mopps reduces the fee for the third year to 10,000, and Conklin agrees to a 4-year extension that will extend services through December 31, 2024, at a price of 15,000 per year. At the time that the contract is modified, Mopps is charging other customers 13,500 for the cleaning and janitorial service. Required: Should Mopps and Conklin treat the modification as a separate contract? If so how should Mopps account for the contract modification on December 31, 2020? Support your opinion by discussing the application to this case of the factors that need to be considered for determining the accounting for contract modifications.
On January 1, 2019, Piper Company entered into an agreement with Save-Mart to sell its most popular product, the gadget. The contract stipulates that the price per unit will decrease as Save-Mart purchases higher volumes of the gadget, as follows: The contract states that Save-Mart pays Piper the unit price based on the current sales volume. Once a volume threshold is reached, the price is retroactively reduced to the applicable price per unit. Based on its past experience with similar contracts, Piper believes that the total sales volume for the year will be 1,800 units and uses the most likely amount approach to estimate variable consideration. In addition, Piper concludes it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty surrounding the variable consideration is resolved. Required: 1. Determine the transaction price per unit that Piper should use to record revenue. 2. Assume that Save-Mart purchases 800 units in the first quarter of 2019 and 900 units in the second quarter of 2019. Prepare Pipers journal entries to record the sales in the first and second quarters. 3. Given the higher than expected sales volume in the first half of the year, Piper increases its estimate of the sales volume to 2,800 units. Prepare the journal entry to record this change in estimate.
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