Question

Rocky Guide Service provides guided 1-5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,800 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $180 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of excellent" by Wilderness customers. The $1,800 per day and any bonus due are paid in one lump payment shortly after the end of each month. . On July 1, based on prior experience, Rocky estimated there is a 30% chance it will earn the bonus for July tours. It guided a total of 10 days from July 1-July 15. . On July 16, based on Rocky's view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 80% chance it would eam the bonus for July tours, Rocky also guided customers for 15 days from July 16- July 31. . On August 5 Rocky learned it did not receive an average evaluation of excellent for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours. Rocky bases estimates of variable consideration on the expected value it expects to receive. Required: 1. to 3. Prepare the journal entries to record the transactions above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

The journal entries to be booked will be as under:

Date	Description	Debit ($)	Credit ($)	Workings
Jul-15	Accounts Receivable	18,000		1800*10 (tour revenue per day * No. of days)
	Bonus Receivable	540		180*10*30% (bonus per day * no. of days * probability of receiving bonus)
	Service Revenue		18,540	18000+540
Jul-31	Accounts Receivable	29,160		27000+2160
	Bonus Receivable		2,160	180*15*80%
	Service Revenue		27,000	1800*15
Aug-05	Cash	45,000		18000+27000
	Accounts Receivable		45,000
Aug-05	Service Revenue	2,700		540+2160
	Bonus Receivable		2,700

Please comment in case of any issue and I will be happy to help.

Answer 2

1.
During the July 1–July 15 period, Rocky estimates a less than 50% chance it will earn the bonus, so using the "most likely amount" approach, it assumes no bonus, and estimates its revenue as $2,900 per day × 10 days = $29,000.
 
2.
During the July 16–July 31 period, Rocky earns guide revenue of another 15 days × $2,900 per day = $43,500. In addition, because Rocky estimates a greater than 50% chance it will earn the bonus, using the “most likely amount” approach, it estimates a bonus receivable of $290 per day × (10 days + 15 days) = $7,250.
 
3.
On August 5, Rocky learns that it won’t receive a bonus, and receives only the $72,500 balance in accounts receivable. Rocky must reduce its bonus receivable to zero and record the offsetting adjustment in revenue.