Question

Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $84,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $28,000 or will be entitled to an additional $28,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $28,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $28,000.

Required:
1. to 4. Prepare the journal entries related to the contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Record the entry at the start of fifth month, to recognize the change in estimate associated with the reduced likelihood that the $28,000 bonus will be received.

Record the entry to record revenue each month for the second four months of the contract.

Journal entry worksheet

• Record the entry after eight months to record receipt of the $28,000 bonus.

Answer 1

credit Loebit Ale drj $84,000 dr $2,100 ... $86100 Al do $5,600 $ 5,600 Answer Journal Entries: Smo particulars | Accounts receivable - Boney receivable Ale to revenue | 2 | Service revenue - To Bonus receivable 13 Account receivable Boney receivable 1. To service revenue I cash TO Boney receivable to service revenue | Working notes Alcar$84000 s 700 1$ 84,700 Alc ar $28000 $ 5600 $22400 possible prices 184,000x8) + 28000 = 700,000 184000x8) – 28000 = 644000 Probability Expected Consideration 80% 560000 20% 128800 688800 68880018 -86100 Velocity is guaranteed to receive 84000 Balance -864.00 -84000=2100 I possible prices (84000x8) + 28000 = 700000 (84000X8)-28000 = 644000 Prosabilities Exputed kosideration 60% 420000 257,600 677600 84000x8= 672000 677,600-672000 - 5600 5000/8 = 700 s