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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On February 1, 2019, Silicon Rentals contracts with Zurgg Technology to provide 6 months of office services in exchange for 18,000 shares of Zurgg’s common stock. The contract is signed on that date and works starts immediately. Silicon appropriately determines that its performance obligation is satisfied over time and each month it receives 3,000 shares of Zurgg Technology common stock. The fair value of Zurgg’s common stock at February 28, 2019, and March 31, 2019, is $40 and $31, respectively.

Required:

  1. 1. Prepare Silicon’s journal entries related to recognize service revenue for February and March.
  2. 2. Assume that Silicon could not estimate the fair value of Zurrgg’s common stock. How would Silicon determine fair value?

1.

To determine

Journalize entries associated with recognition of service revenue for the month of February and March.

Explanation

Noncash consideration:

Noncash consideration is a form of consideration other than cash which is promised by the customer, in this situation the seller includes the “fair value” of the noncash consideration at the commencement of the contract in the transaction price.

Journal entry:

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

Accounting rules for Journal entries:

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

Prepare journal entries:

DateAccount title and explanationDebit ($)Credit ($)
February 28,2019 Available-for-sale investment120,000 
     Service revenue (1)120,000
      (To record the service revenue)  

Table (1)

  • Available-for-sale-investment is a component of stockholders’ equity and it is decreased. Therefore, debit Available-for-sale-investment account by $120,000.
  • Service revenue is a component of stockholders’ equity and it is increased. Therefore, credit service revenue account by $120,000.
DateAccount title and explanationDebit ($)Credit ($)
March 31,2019 Available-for-sale investment93,000 
     Service revenue (2)93,000
           (To record the service revenue)  

Table (2)

  • Available-for-sale-investment is a component of stockholders’ equity and it is decreased. Therefore, debit Available-for-sale-investment account by $93,000.
  • Service revenue is a component of stockholders’ equity and it is increased...

2.

To determine

State the manner in which the Company S will ascertain fair value.

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