Question

Client B Per the contract, "if in any year, determined on the basis of a calendar year the services generate annual profit in excess of 7% of Gross Sales, company will pay to client an amount equal to 60% of the annual profit in excess of the company retention, and the company shall be entitled to 40% of the annual profit in excess of the company's Retention." Profit Center: Client B TOTAL 3.875,975 Period TOTAL SALES YTD TOTAL SALES TOTAL PERSONNEL COST TOTAL OTHER COSTS PROFITX(LOSS) YTD PROFIT (LOSS) 3 P&L Reporting From Period 1. 2015 To Period 12, 2015 2.2015 3.2015 356,272 257,142 855,812 1,112,954 227,413 98,252 156,260 104,017 -27,401 54,873 10,694 44,179 1. 2015 499540 499,540 184,528 298,405 16,607 16,707 4,2015 164,622 1,277,576 83,875 98,561 -17,814 26,365 5. 2015 367,387 1.644,963 134,835 163,383 69,169 95,534 6, 2015 352,054 1.997,017 137,988 137, 111 6,955 72,489 7.2015 511,412 2,508,429 187,794 25,210 8,408 270,897 8.2015 269,492 2,777,921 110,418 06,419 52,655 23,552 9.2015 125,587 2.903,508 96,447 106,509 -77.369 246,183 10,2015 3 90,566 3.294,074 169,433 2 02,647 1 8,486 264,669 11, 2015 216,342 .510,416 114,842 123,286 -21,786 242,883 12. 2015 365,559 3,875,975 149,089 141,996 74,474 317,357 1 2 9 1.694,914 1863,804 317.257 7 1 3 Question: Will the company incur a liability in this arrangement? If so, what period will such liability first be recognized? Please show your calculation and provide any entries necessary to properly state the financials in that period of time.

Answer 1

PARTICULARS Apr-15 Oct-15 Feb-15 Mar-15 Jul-15 Sep-15 Dec-15 TOTAL Jan-15 May-15 Jun-15 Aug-15 Nov-15 TOTAL SALES $499,540.00 $356,272.00 $ 257,142.00 $ 164,622.00 $ 367,387.00 $ 352,054.00 $ 511,412.00 $ 269,492.00 $ 125,587.00 $ 390,566.00 $ 216,342.00 $ 365,559.00 $ 3,875,975.00 $855,812.00 $1,112,954.00 $1,277,576.00 $1,644,963.00 $1,997,017.00 $2,508,429.00 $2,777,921.00 $2,903,508.00 $3,294,074.00 $3,510,416.00 $ 3,875,975.00 $499,540.00 YTD SALES TOTAL PERSONAL 83,875.00 $ 134,835.00 $ 137,988.00 $ 187,794.00 $ 110,418.00 $ 98,561.00 $ 163,383.00 $ 137,111.00 $ 225,210.00 $ 106,419.00 $ 106,509.00 $ 202,647.00 $ 123,286.00 $ 141,996.00 $1,863,804.00 96,447.00 $ 169,433.00 $ 114,842.00 $ 149,089.00 $1,694,914.00 $184,528.00 $227,413.00 $ TOTAL OTHER COST $298,405.00 $156,260.00 $ 104,017.00 $ 98,252.00 | Ś COST PROFIT(LOSS) $ 16,607.00 $ (27,401.00) $ 54,873.00 $ (17,814.00) $ 18,486.00 $ (21,786.00) $ 74,474.00 $ 317,257.00 69,169.00 $ 76,955.00 $ 98,408.00 $ 52,655.00 $ (77,369.00) $ 95,434.00 $ 172,389.00 $ 270,797.00 $ 323,452.00 $ 246,083.00 $ 264,569.00 $ 242,783.00 $ 317,257.00 $ 16,607.00 $ (10,794.00) $ (7.69) $ (1.26) $ 44,079.00 $ 21.34| $ 3.96 $ 26,265.00 $ (10.82) $ 2.06 $ YTD PROFIT (10.07) $ 6.92 $ 3.32 $ 19.24 | $ 19.54 | $ 11.64 | $ (61.61) $ 8.48 $ 4.73 $ 8.03 $ 18.83 $ 21.86 $ GP 20.37 10.80 $ 3.32 $ 5.80 $ 8.63 $ YTD GP 8.19

Hence

the liability is first recognized in June 2015.

Notes:

GP=Profit/Sales

YTD GP= YTD Profit/YTD Sales