Question

Went Wlowing samt apters 18, 7 and 8th stice test to help you id above. The sample ex 1. Revenue Recognition (20 points) REQUIRED: Provide answers for questions 1-4 in the space provided. 1. What is the five-step process for revenue recognition? 2. On March 1, 2003, the Star Printing Company received a $45.000 payment for annual magazine subscriptions (the subscriptions run from the March, 2003 edition through the February 2004 edition). Upon receipt of the payment, Star Printing credited the amount to sales revenue. Provide any entries necessary to correctly state sales revenue on the 2003 income statement Account name Debit Credit 3. Peabody Construction Company enters into a contract with a customer to build a warehouse for $100,000, with a performance bonus of $50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts that Peabody has performed previously, and management believes that such experience is predictive for this contract Management estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed! week late, and only a 10% probability that it will be completed 2 weeks late. How should Peabody account for this revenue arrangement?

Answer 1

Answer-1:

The five step process for revenue recognition are as follows:-

• Step 1: Identify the contract with a customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

Answer-2:

Total revenue received for the period from March 2003 to February 2004 is $45,000

Revenue to be recognised upto December 2003 = $45,000 / 12 × 10 = $37,500

Unearned revenue up to December 2003 = $45,000 - $37,500 = $7,500

Star Company have debited Cash account and credited Sales revenue with $45,000.

So the rectification entry will be:-

Debit ($) Credit ($) 7,500 Account Name Date Sales revenue Dec.31 7,500 Unearned revenue

Answer-3:

Contract price = $100,000

Prob-weighted Completion Performance Probability time bonus time On schedule One week late Two week late 60%$ 30% $ 10% $ $ 50,000 30,000 45,000 13,500 40,000 4,000 Total $ 47,500

Total transaction price = $100,000 + $47,500 = $147,500

Peabody Construction should account for $147,500 as revenue.