Requirement – 1
Performance obligation:
Performance obligation is the promise made by the seller to supply the goods and service to the customer on or before the contract.
Variable consideration:
Variable consideration refers to the uncertain transaction price that depends upon the outcome of future events.
Contract:
Contract is a written document that creates legal enforcement for buying and selling the property. It is committed by the parties to performing their obligation and enforcing their rights.
Deferred revenues:
Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. For the portion of rendered services or delivered goods, revenues would be recognized by way of passing an
Rules of Debit and Credit:
Following rules are followed for debiting and crediting different accounts while they occur in business transactions:
- Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
- Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.
To prepare: The
Requirement – 1
Answer to Problem 5.8P
Journal entry for revenue is as follows:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $60,000 | |||
Bonus receivable | $1,500 | |||
Service revenue (Refer to equation (4)) | $61,500 | |||
(To record service performed) |
Table (1)
Explanation of Solution
- Cash is an asset, and it increases the value of asset by $60,000, hence debit the cash for $60,000.
- Bonus receivable is an asset, and it increases the value of asset by $1,500, hence debit the bonus receivable for $1,500.
- Service revenue increases the value of
stockholders’ equity by $61,500 hence credit the Service revenue for $61,500.
Working note:
1. Calculate the expected value:
Given,
Revenue is $60,000
Cost of saving is $20,000
Number of payments is 8
2. Calculate the expected value:
Given,
Revenue is $60,000,
Cost of saving is $20,000,
Number of payments is 8.
3. Calculate the expected contract price:
Given,
Revenue is $60,000,
Cost of saving is $20,000,
Number of payments is 8.
Expected value | Probability | Expected consideration |
$500,000 (Refer to equation (1)) | 80% | $400,000
|
$460,000(Refer to equation (2)) | 20% | $92,000
|
Expected contract price | $492,000 |
Table (2)
(3)
4. Calculate the value of service revenue:
Given,
Calculated expected contract price is $492,000 (3)
Number of payments is 8.
Therefore, the journal entry for service revenue is recorded.
Requirement – 2
To prepare: The journal entry for recognized bonus of Company V.
Requirement – 2
Answer to Problem 5.8P
Journal entry for recognized bonus is as follows:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Service revenue | $4,000 | |||
Bonus receivable (Refer to equation (6)) | $4,000 | |||
(To record offsetting adjustment in revenue) |
Table (3)
Explanation of Solution
- Service revenue increases the value of stockholders’ equity by $28,000 hence credit the Service revenue for $28,000.
- Bonus receivable is an asset, and it increases the value of asset by $20,000, hence debit the bonus receivable for $20,000.
Working note:
1. Calculate the expected contract price:
Given,
Revenue is $60,000,
Cost of saving is $20,000,
Number of payments is 8.
Expected value | Probability | Expected consideration |
$500,000 (1) | 60% | $300,000
|
$460,000 (2) | 40% | $184,000
|
Expected contract price | $484,000 |
Table (4)
(5)
2. Calculate the value of bonus receivable:
Given,
Calculated expected contract price is $484,000 (5)
Number of payments is 8.
Revenue is $60,000
Therefore, the journal entry for recognized bonus of Company V is recorded.
Requirement – 3
To prepare: The journal entry to record the revenue each month for the second four months of the contract.
Requirement – 3
Answer to Problem 5.8P
Journal entry for recognized revenue is as follows:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Accounts receivable | $60,000 | |||
Bonus receivable | $500 | |||
Service revenue (Refer to equation (7)) | $60,500 | |||
(To record offsetting adjustment in revenue) |
Table (5)
Explanation of Solution
- Accounts receivable is an asset, and it increases the value of asset by $60,000, hence debit the accounts receivable for $60,000.
- Bonus receivable is an asset, and it increases the value of asset by $500, hence debit the bonus receivable for $500.
- Service revenue increases the value of stockholders’ equity by $60,500 hence credit the Service revenue for $60,500.
Working note:
Calculate the value of service revenue:
Given,
Calculated expected contract price is $484,000 (5)
Number of payments is 8.
Therefore, the journal entry for revenue recognized by Company V is recorded.
Requirement – 4
To prepare: The journal entry to record the bonus cash received.
Requirement – 4
Answer to Problem 5.8P
Journal entry for bonus as follows:
Date | Account Title and Explanation | Post Ref. | Debit | Credit |
Cash | $20,000 | |||
Bonus receivable | $4,000 | |||
Service revenue (Refer to equation (8)) | $16,000 | |||
(To record service performed) |
Table (6)
Explanation of Solution
- Cash is an asset, and it increases the value of asset by $20,000, hence debit the cash for $20,000.
- Bonus receivable is an asset, and it decreases the value of asset by $4,000, hence credit the bonus receivable for $4,000.
- Service revenue increases the value of stockholders’ equity by $16,000 hence credit the Service revenue for $16,000.
Working notes:
Calculate the value of service revenue:
Given,
Bonus accumulated is $4,000
Expected bonus is $20,000
Therefore, the journal entry for bonus cash received is recorded.
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Chapter 5 Solutions
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