Intermediate Accounting IFRS 2nd Edition solutions manual - chapter 18 - Revenue Recognition

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Solutions manual (questions and solutions) of Intermediate Accounting IFRS 2nd Edition by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, chapter 18 - Revenue Recognition
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  • 1. Intermediate Accounting IFRS Edition-2nd Questions & Solutions Chapter 18 Revenue Recognition Donald E. Kieso Jerry J. Weygandt Terry D. Warfield
  • 2. BE18-1 On May 10, 2015, Cosmo Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2015. Greig agrees to pay the full contract price of €2,000 on July 15, 2015. The cost of the goods is €1,300. Cosmo delivers the product to Greig on June 15, 2015, and receives payment on July 15, 2015. Prepare the journal entries for Cosmo related to this contract. BE18-2 Stengel Co. enters into a 3-year contract to perform maintenance services to Laplante Inc. Laplante promises to pay $100,000 at the beginning of each year (the standalone selling price of the service at con- tract inception is $100,000 per year). At the end of the second year, the contract is modified and the fee for third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to $80,000 (the standalone selling price of the services at the beginning of the third year is $80,000 per year). Briefly describe the accounting for this contract modification. BE18-3 Ismail Construction enters into a contract to design and build a hospital. Ismail is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing. Does Ismail have a single performance obligation to the customer in this revenue arrangement? Explain. BE18-4 Mauer Company licenses customer-relationship software to Hedges Inc. for 3 years. In addition to providing the software, Mauer promises to perform consulting services over the life of the license to main- tain operability within Hedges’ computer system. The total transaction price is £200,000. Based on stand- alone values, Mauer estimates the consulting services have a value of £75,000 and the software license has a value of £125,000. Upon installation of the software on July 1, 2015, Hedges pays £100,000; the contract balance is due on December 31, 2015. Identify the performance obligations and the revenue in 2015, assum- ing (a) the performance obligations are interdependent and (b) the performance obligations are not interdependent. BE18-5 Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2015. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability August 1, 2015 70% August 8, 2015 20 August 15, 2015 5 After August 15, 2015 5 Determine the transaction price for this contract. 3 3 4 4 5 BRIEF E XE RCISE S
  • 3. Brief Exercises 933 BE18-6 Referring to the revenue arrangement in BE18-5, determine the transaction price for the contract, assuming (a) Nair is only able to estimate whether the building can be completed by August 1, 2015, or not (Nair estimates that there is a 70% chance that the building will be completed by August 1, 2015), and (b) Nair has limited information with which to develop a reliable estimate of completion by theAugust 1, 2015, deadline. BE18-7 On January 2, 2015, Adani Inc. sells goods (cost R$6,000) to Geo Company in exchange for a zero- interest-bearing note with face value of R$11,000, with payment due in 12 months. The fair value of the goods at the date of sale is R$10,000. Prepare the journal entry to record this transaction on January 2, 2015. How much total revenue should be recognized on this sale in 2015? BE18-8 On March 1, 2015, Parnevik Company sold goods to Goosen Inc. for €660,000 in exchange for a 5-year, zero-interest-bearing note in the face amount of €1,062,937. The goods have an inventory cost on Parnevik’s books of €400,000. Prepare the journal entries for Parnevik on (a) March 1, 2015, and (b) December 31, 2015. BE18-9 Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells $4,000 of prepaid cards in January 2015. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is $3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April. BE18-10 Manual Company sells goods to Nolan Company during 2015. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. Prepare the journal entry that Manual should make to record the sale of the 11,000 units in the first quarter of the year. BE18-11 Geraths Windows manufactures and sells custom storm windows for three-season porches. Geraths also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Geraths enters into the follow- ing contract on July 1, 2015, with a local homeowner. The customer purchases windows for a price of £2,400 and chooses Geraths to do the installation. Geraths charges the same price for the windows irrespective of whether it does the installation or not. The price of the installation service is estimated to have a fair value of £600. The customer pays Geraths £2,000 (which equals the fair value of the windows, which have a cost of £1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2015, Geraths completes installation on October 15, 2015, and the customer pays the balance due. Prepare the journal entries for Geraths in 2015. (Round amounts to nearest pound.) BE18-12 Refer to the revenue arrangement in BE18-11. Repeat the requirements, assuming (a) Geraths esti- mates the standalone value of the installation based on an estimated cost of £400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the fair value of the installation. (Round amounts to nearest pound.) BE18-13 On July 10, 2015, Amodt Music sold CDs to retailers on account and recorded sales revenue of €700,000 (cost €560,000). Amodt grants the right to return CDs that do not sell in 3 months following deliv- ery. Past experience indicates that the normal return rate is 15%. By October 11, 2015, retailers returned CDs to Amodt and were granted credit of €78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2015, and (b) €78,000 of returns on October 11, 2015. BE18-14 Kristin Company sells 300 units of its products for $20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is $12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability- weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Prepare the journal entry for Kristin at the time of the sale to Logan. BE18-15 On June 1, 2015, Mills Company sells $200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2015, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that condi- tions for recognizing the sale have been met) for Mills on June 1 and September 1, 2015. The cost of the shelving units to Mills is $110,000. 5 5 5 5 5 6 6 7 8 8 8
  • 4. 934 Chapter 18 Revenue Recognition BE18-16 Travel Inc. sells tickets for a Caribbean cruise on ShipAway Cruise Lines to Carmel Company employees. The total cruise package price to Carmel Company employees is R$70,000. Travel Inc. receives a commission of 6% of the total price. Travel Inc. therefore remits R$65,800 to ShipAway. Prepare the journal entry to record the remittance and revenue recognized by Travel Inc. on this transaction. BE18-17 Jansen Corporation shipped $20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of $2,000. Gooch Company paid $500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for $21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen’s journal entry when the cash is received. BE18-18 Talarczyk Company sold 10,000 Super-Spreaders on July 1, 2015, at a total price of €1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is €550,000. The assurance warranties extend for a 2-year period and are estimated to cost €40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for €12,000. Prepare the journal entries that Talarczyk should make in 2015 related to the sale and the related warranties. BE18-19 On May 1, 2015, Mount Company enters into a contract to transfer a product to Eric Company on September 30, 2015. It is agreed that Eric will pay the full price of $25,000 in advance on June 15, 2015. Eric pays on June 15, 2015, and Mount delivers the product on September 30, 2015. Prepare the journal entries required for Mount in 2015. BE18-20 Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a non-refundable initiation fee of $100 and an annual membership fee of $5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year? *BE18-21 Turner, Inc. began work on a £7,000,000 contract in 2015 to construct an office building. During 2015, Turner, Inc. incurred costs of £1,700,000, billed its customers for £1,200,000, and collected £960,000. At December 31, 2015, the estimated future costs to complete the project total £3,300,000. Prepare Turner’s 2015 journal entries using the percentage-of-completion method. *BE18-22 Guillen, Inc. began work on a $7,000,000 contract in 2015 to construct an office building. Guillen uses the cost-recovery method. At December 31, 2015, the balances in certain accounts were Construction in Process $1,715,000,Accounts Receivable $240,000, and Billings on Construction in Process $1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2015, statement of financial position. *BE18-23 Archer Construction Company began work on a $420,000 construction contract in 2015. During 2015, Archer incurred costs of $278,000, billed its customer for $215,000, and collected $175,000. At December 31, 2015, the estimated future costs to complete the project total $162,000. Prepare Archer’s journal entry to record profit or loss, if any, using (a) the percentage-of-completion method and (b) the cost-recovery method. *BE18-24 Frozen Delight, Inc. charges an initial franchise fee of $75,000 for the right to operate as a fran- chisee of Frozen Delight. Of this amount, $25,000 is collected immediately. The remainder is collected in four equal annual installments of $12,500 each. These installments have a present value of $41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2015, training is completed, and the store opens on July 1, 2015. Prepare the journal entries required by Frozen Delight in 2015. 8 8 8 9 8 10 11 12 13 E18-1 (Sales with Discounts) Jupiter Company sells goods to Danone Inc. on account on January 1, 2015. The goods have a sales price of €610,000 (cost €500,000). The terms of the sale are net 30. If Danone pays within 5 days, it receives a cash discount of €10,000. Past history indicates the cash discount will be taken. Instructions (a) Prepare the journal entries for Jupiter for January 1, 2015. (b) Prepare the journal entries for Jupiter for January 31, 2015, assuming Danone does not make payment until January 31, 2015. 3 5 EXE RCISE S
  • 5. Exercises 935 E18-2 (Transaction Price) Presented below are three revenue recognition situations. (a) Grupo sells goods to MTN for $1,000,000, payment due at delivery. (b) Grupo sells goods on account to Grifols for $800,000, payment due in 30 days. (c) Grupo sells goods to Magnus for $500,000, payment due in two installments: the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is $464,000. Instructions Indicate the transaction price for each of these transactions and when revenue will be recognized. E18-3 (Contract Modification) In September 2015, Gaertner Corp. commits to selling 150 of its iPhone- compatible docking stations to Better Buy Co. for R$15,000 (R$100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver 45 more products for an additional R$4,275 (R$95 per station). All sales are cash on delivery. Instructions (a) Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is R$54. (b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the con- tract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately. (c) Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used. E18-4 (Contract Modification) Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2015, Tyler entered into a 3-year service con- tract with Walleye Tech. Walleye promises to pay $10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract. Instructions (a) Prepare the journal entries for Tyler in 2015 and 2016 related to this service contract. (b) Prepare the journal entries for Tyler in 2017 related to the modified service contract, assuming a prospective approach. (c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modi- fication results in a separate performance obligation. E18-5 (Variable Consideration) Bai Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Bai will receive a payment of ¥10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Bai determines it is 90% likely that the drug will gain approval and a 10% chance of denial. Instructions (a) Determine the transaction price of the arrangement for Bai Biotech. (b) Assuming that regulatory approval was granted on December 20, 2015, and that Bai received the payment from Pang on January 15, 2016, prepare the journal entries for Bai. E18-6 (Trailing Commission) Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of $100. In addition, Aaron will receive an additional commission of $10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change. Instructions (a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold. (b) Prepare the journal entries, assuming that the 100 policies are sold in January 2015 and that Aaron receives commissions from Capital. 3 5 3 3 5 5
  • 6. 936 Chapter 18 Revenue Recognition E18-7 (Sales with Discounts) On June 3, 2015, Hunt Company sold to Ann Mount merchandise having a sales price of £8,000 (cost £5,600) with terms of 2/10, n/60, f.o.b. shipping point. Hunt estimates that mer- chandise with a sales value of £800 will be returned. An invoice totaling £120, terms n/30, was received by Mount on June 8 from Olympic Transport Service for the freight cost. Upon receipt of the goods, on June 5, Mount notified Hunt that £300 of merchandise contained flaws. The same day, Hunt issued a credit memo covering the defective merchandise and asked that it be returned at Hunt’s expense. Hunt estimates the returned items to have a fair value of £120. The freight on the returned merchandise was £24, paid by Hunt on June 7. On June 12, the company received a check for the balance due from Mount. Instructions (a) Prepare journal entries for Hunt Company to record all the events noted above assuming sales and receivables are entered at gross selling price. (b) Prepare the journal entry assuming that Ann Mount did not remit payment until August 5. E18-8 (Sales with Discounts) Taylor Marina has 300 available slips that rent for €800 per season. Payments must be made in full at the start of the boating season, April 1, 2015. The boating season ends October 31, and the marina has a December 31 year-end. Slips for future seasons may be reserved if paid for by Decem- ber 31, 2015. Under a new policy, if payment for 2016 season slips is made by December 31, 2015, a 5% discount is allowed. If payment for 2017 season slips is made by December 31, 2015, renters get a 20% discount (this promotion hopefully will provide cash flow for major dock repairs). On December 31, 2014, all 300 slips for the 2015 season were rented at full price. On December 31, 2015, 200 slips were reserved and paid for the 2016 boating season, and 60 slips were reserved and paid for the 2017 boating season. Instructions (a) Prepare the appropriate journal entries for December
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