Question

On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $3 million, and construction is expected to take 18 months. Drewry is billed and pays $1,500,000 of the contract price on January 2, 2019, and will pay the balance at completion.

TI estimates that the cost of construction will be $2.2 million.

Drewry includes two performance bonuses in the contact:

•	U.S. Bonus: If the equipment design receives a U.S. patent by March 15, 2020, Drewry will pay a $300,000 bonus.
•	International Bonus: If the equipment receives approval for international distribution by January 31, 2020, Drewry will pay a $1,000,000 bonus.

The bonuses are payable when a U.S. patent is approved and when international distribution is approved.

On the date the contract is signed, IT estimates that there is an 80% chance it will receive U.S. patent protection by March 15, 2020, but only a 30% chance that the equipment will be approved for international distribution.

TI received a U.S. patent on the equipment design on November 15, 2019, and immediately billed Drewry and received its bonus payment. On December 31, 2019, TI has incurred $1,760,000 of contract costs and is 80% complete. TI won approval for international distribution on January 15, 2020, and completed the equipment project on April 15, 2020, at a cost of $2,200,000.

Required:

1.	Identify the performance obligations in the contract.
2.	Provide the journal entries that TI should make to recognize revenue from the contract.

Please use titles from the chart of accounts

CHART OF ACCOUNTS

Drewry Corp.General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
155	Construction in Progress
156	Partial Billings
181	Equipment
198	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Construction Expenses
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Thanks!

Answer 1

1.	Identify the performance obligations in the contract.

a. build a new piece of equipment for $3M

b. Variable considerations however not attributable to principle performance obligation of build a new piece of equipment :

i. equipment design receives a U.S. patent by March 15, 2020 bonus amount 300,000

ii. equipment receives approval for international distribution by January 31, 2020 bonus amount 1,000,000

The variable consideration performance obligation is not delivered over time but on point of time & hence it will be recognized when performance obligation is delivered while in case build a new piece of equipment the performance obligation is delivered over time hence revenue and expense will be recognized on % of completion basis

2. Provide the journal entries that TI should make to recognize revenue from the contract :

Date	Accounts	Debit	Credit
15th Nov 2019	Account Receivable	300,000.00
	Sales Revenue		300,000.00
	(Revenue recognized and invoice raised for completion of performance obligation of patent on equipment contract
31st Dec 2019	Sales Revenue	2,400,000.00
	Accounts Receivable		2,400,000.00
	(Revenue recognized for 80% completion of contract
31st Dec 2019	Construction Expenses	1,760,000.00
	Construction in Progress		1,760,000.00
	(Expense recongnized on 80% completion)
15th Jan 2020	Account Receivable	1,000,000.00
	Sales Revenue		1,000,000.00
	(Revenue recognized and invoice raised for completion of performance obligation of approval of international distribution)
15th April 2020	Sales Revenue	2,400,000.00
	Accounts Receivable		2,400,000.00
	(Revenue recognized & invoice raised for balance 20% on completion of contract)
15th April 2020	Construction Expenses	440,000
	Construction in Progress		440,000.00
	(Expense recognized on balance 20% on completion of contract)