Chapter 17, Problem 5P

1.

To determine

Ascertain the transaction price and state the manner in which the sales commission must be accounted.

Explanation of Solution

Transaction price:

Transaction price is the amount of consideration that is estimated by the company to be authorized in exchange, for delivering the promised goods and services to the customer. Transaction price is examined by the seller by analyzing the terms of the contract and the normally conducts of the business

• Sales commission is capitalized as a “contract cost asset and amortized on a systematic basis consistent” with the probable pattern of transfer of the related goods or services under the contract, since the sales commission is an “incremental cost”. FASB ASC 340-40- 25-1 states that:
• “An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs”.
• Only incremental must be identified as assets. “Incremental costs” of attaining a contract are those costs that would not have been incurred by the entity if the contract had not been obtained (i.e., sales commissions).

2.

To determine

Discuss if the delayed payment contract contains a significant financing contract.

Explanation of Solution

Identifying a “significant financing component” in a contract needs judgment. It could be generally difficult in a long-term arrangement where a product or service delivery and cash payment takes place during the term of the contract. FASB ASC 606-10-32-19 states that:

“[W]hen adjusting the promised amount of consideration for a significant financing component, an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract”.

3.

To determine

Journalize entries of Company O for the year 2017.

Explanation of Solution

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 2017	Accounts receivable (1)	456,000
	Sales revenue (2)		400,000
	Unearned interest $(\$456,000-\$400,000)$		56,000
	(To record the amount of  accounts receivable)
	Sales commission (3)	20,000
	Cash		20,000
	(To record the amount of sales commission)
December 31,2017	Unearned interest (4)	56,000
	Interest revenue		56,000
	(To record the amount of unearned interest)
	Cash (5)	456,000
	Accounts receivable		456,000
	(To record the amount of cash)
	Sales commission expense (3)	20,000
	Sales commission		20,000
	(To record the amount of sales commission expense)

Table (1)

Working notes:

(1)Calculate the amount of accounts receivable:

$\begin{array}{c}\text{Accounts}\text{receivable}\text{=}\text{Number}\text{of}\text{machines}\text{sold}\text{×}\text{Sales}\text{price}\text{per}\text{machine}\\ \text{=10}\text{×}\text{\$45,600}\\ \text{=\$45,600}\end{array}$

(2)Calculate the amount of sales revenue:

$\begin{array}{c}\text{Sales}\text{revenue}\text{=}\left(\begin{array}{l}\text{Number}\text{of}\text{machines}\text{sold}\text{×}\text{Payment}\text{made}\\ \text{during}\text{delivery}\text{and}\text{installation}\end{array}\right)\\ \text{=}\text{10}\text{×}\text{\$40,000}\\ \text{=\$400,000}\end{array}$

(3)Calculate the amount of sales commission:

$\begin{array}{c}\text{Sales}\text{commission}\text{=}\text{Sales}\text{revenue}\text{×}\text{Pecentage}\text{of}\text{commision}\\ \text{=\$400,000}\text{×}\text{5\%}\\ \text{=\$20,000}\end{array}$

(4)Calculate the amount of unearned interest:

$\begin{array}{c}\text{Unearned}\text{interest}\text{=}\text{Percentage}\text{of}\text{interest}\text{×}\text{Sales}\text{revenue}\\ \text{=14\%}\text{×}\text{\$400,000}\\ \text{=\$56,000}\end{array}$

(5)Calculate the amount of cash:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{machines}\text{sold}\text{×}\text{Sales}\text{price}\text{per}\text{machine}\\ \text{=10}\text{×}\text{\$45,600}\\ \text{=\$456,000}\end{array}$

4.

To determine

Journalize entries of Company P for the year 2017

Explanation of Solution

Prepare journal entries:

Date	Account titles and Explanation	Debit ($)	Credit ($)
January 2017	Cash (6)	400,000
	Sales revenue		400,000
	(To record the amount of  sales revenue)
	Sales commission expense (3)	20,000
	Cash		20,000
	(To record the sales commission expense)

Table (2)

Working note:

(6)Calculate the amount of cash:

$\begin{array}{c}\text{Cash}\text{=}\text{Number}\text{of}\text{machines}\text{sold}\text{×}\text{Payment}\text{made}\text{during}\text{delivery}\text{and}\text{installation}\\ \text{=10}\text{×}\text{\$40,000}\\ \text{=\$400,000}\end{array}$