Chapter 17, Problem 4P

1.

To determine

Identify the performance obligation in the contract.

Explanation of Solution

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

No performance obligation is present in the contract. It is to be noted that the Country U.S. patent and the international distribution are not considered as performance obligations since, Company TI cannot attain the benefit from either the “patent or the international distribution rights” on its own or with other readily obtainable resources (incapable of being distinct) nor are these rights independently identifiable from other promises in the contract (not distinct within the context of the contract).

2.

To determine

Journalize entries to record the revenue recognition from the contract.

Explanation of Solution

Revenue recognition by Companies:

Companies must recognise revenues to represent the “Transmission of promised goods and services to customers in an amount that reflects the consideration” to which the entity anticipates to be authorized in exchange for those good and services.

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:

Date	Account Titles and Explanation	Debit ($)	Credit ($)
January 2,2017	Accounts receivable	1,500,000
	Partial Billings		1,500,000
	( To record partial billings)
January 2,2017	Cash	1,500,000
	Accounts receivable		1,500,000
	(To record collection)
November 15, 2017	Account receivables	300,000
	Partial billings		300,000
	( To record partial billings)
November 15, 2017	Cash	300,000
	Accounts receivable		300,000
	(To record collection)
December 31,2017	Construction in progress	1,760,000
	Materials inventory, cash etc.		1,760,000
	(To record construction costs)
December 31,2017	Construction expense	1,760,000
	Construction in progress $(\$2,640,000-\$1,760,000)$	880,000
	Sales revenue (3)		2,640,000
	(To record gross profit)
January 15,2017	Accounts receivable	1,000,000
	Partial billings		1,000,000
	( To record partial billings)
January 15,2017	Cash	1,000,000
	Accounts receivable		1,000,000
	(To record collection)
April 15,2017	Accounts receivable	1,500,000
	Partial billings		1,500,000
	( To record partial billings)
April 15,2017	Cash	1,500,000
	Accounts receivable		1,500,000
	(To record collection)
April 15,2017	Construction in progress (5)	440,000
	Materials inventory, cash, etc.		440,000
	(To record construction costs)
April 15,2017	Construction expense (5)	440,000
	Construction in progress $(\$1,660,000-\$440,000)$	1,220,000
	Sales revenue		1,660,000
	(To record gross profit)
April 15,2017	Partial billings (6)	4,300,000
	Construction in progress		4,300,000
	( To record partial billings and close construction in progress)

Table (1)

Working notes:

(1)Calculate the total estimated costs for the year 2017 and 2018:

	2017	2018
Actual cost incurred to date	$1,760,000	$2,200,000
Estimate cost to compute	(5)$440,000	0
Total estimated costs	$2,200,000	$2,200,000
Progress toward completion	80%	100%

Table (2)

(2)Calculate the amount of total sales revenue:

$\begin{array}{c}\text{Total}\text{sales}\text{revenue}\text{=}\text{Contract}\text{price}\text{+Amount}\text{of}\text{Country}\text{U}\text{.S}\text{bonus}\\ \text{=\$3,000,000+\$300,000}\\ \text{=\$3,300,000}\end{array}$

(3)Calculate the amount of sales revenue during December 31, 2017:

$\begin{array}{c}\text{Sales}\text{revenue=Total}\text{sales}\text{revenue}\text{×}\text{Percentage}\text{of}\text{work}\text{completed}\\ \text{=}\text{\$3,300,000}\text{(2)}\text{×80\%}\\ \text{=\$2,640,000}\end{array}$

(4)Calculate the amount of total estimated costs during the year 2017:

$\begin{array}{c}\begin{array}{l}\text{Total}\text{estimated}\text{costs}\\ \text{during}\text{the}\text{year}\text{2017}\end{array}\}\text{=}\text{Contract}\text{costs}\text{incurred}\text{×}\text{percentage}\text{of}\text{work}\text{completed}\\ \text{=}\text{\$1,760,000}\text{×}\frac{\text{100}}{\text{80}}\\ \text{=\$2,200,000}\end{array}$

(5)Calculate the amount of estimated costs for the year 2017:

$\begin{array}{c}\begin{array}{l}\text{Estimated}\text{costs}\\ \text{during}\text{the}\text{year}\text{2017}\end{array}\}\text{=}\text{Total}\text{estimated}\text{costs}\times \text{Percentage}\text{yet}\text{to}\text{be}\text{completed}\\ \text{=\$2,200,000}\text{(4)}\text{×}\text{20\%}\\ \text{=\$440,000}\end{array}$

Note: 20% =$100\%-80\%$

(6)Calculate the amount of partial billings:

$\begin{array}{c}\text{Partial}\text{billings}\text{=}\left(\begin{array}{l}\text{Contract}\text{price}\text{+Amount}\text{of}\text{Country}\text{U}\text{.S}\text{bonus}\\ \text{+}\text{Amount}\text{of}\text{International}\text{bonus}\end{array}\right)\\ \text{=\$3,000,000+\$300,000}\text{+}\text{\$1,000,000}\\ \text{=\$4,300,000}\end{array}$