Question

Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2021, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $98,000. The contract specifies that Super Rise will receive an additional $49,000 at the end of the 10 months if there is no unexpected delay, stoppage, or accident during the year. Super Rise estimates variable consideration to be the most likely amount it will receive.

Required:
1. Assume that, because the building sees a constant flux of people throughout the day, Super Rise is allowed to access the elevators and related mechanical equipment only between 3 a.m. and 5 a.m. on any given day, which is insufficient to perform some of the more time-consuming repair work. As a result, Super Rise believes that unexpected delays are likely and that it will not earn the bonus. Prepare the journal entry Super Rise would record on January 1.
2. Assume instead that Super Rise knows at the inception of the contract that it will be given unlimited access to the elevators and related equipment each day, with the right to schedule repair sessions any time. When given these terms and conditions, Super Rise has never had any delays or accidents in the past. Prepare the journal entry Super Rise would record on January 31 to record one month of revenue.
3. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it does not need to spend more than two hours on any given day to operate the elevator safely because the client’s elevator is relatively new. Therefore, Super Rise believes that unexpected delays are very unlikely. Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable.

Answer 1

Solution:

1) Prepare the journal entry Super Rise would record on January 1.

Jan 1 Cash A/c Dr $98000

To Deferred Revenue $98000

  ( As the receipt is shown as deferred revenue as it is for 10 mnths and should be accounted to revenue as and when it is earned )

2)Prepare the journal entry Super Rise would record on Jan 31

Jan 31 Deferred Revenue 9800

Bonus Receivable 4900

To Service Revenue 14700

( On completion of one mnth , Out of the 10th month proportionate revenue if accounted for at the end of the month)

3)Prepare the journal entry Super Rise would record on May 31

May 31 Deferred Revenue 9800

Bonus Receivable 24500 ( 4900*5 ) from jan to may

To Service Revenue 34300