Question

P18.3 (LO 2, 3, 4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation ser- vices for custom patio grilling stations. Instructions Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services. a. Grill Master offers contract GM205, which is comprised of a free-standing gas grill for small patio use plus installation to a customer's gas line for a total price $800. On a standalone basis, the grill sells for $700 (cost $425), and Grill Master estimates that the standalone selling price of the instal- lation service (based on cost-plus estimation) is $150. (The selling of the grill and the installation services should be considered two performance obligations.) Grill Master signed 10 GM205 con- tracts on April 20, 2020, and customers paid the contract price in cash. The grills were delivered and installed on May 15, 2020. Prepare journal entries for Grill Master for GM205 in April and May 2020. b. The State of Kentucky is planning major renovations in its parks during 2020 and enters into a con- tract with Grill Master to purchase 400 durable, easy maintenance, standard charcoal grills during 2020. The grills are priced at $200 each (with a cost of $160 each), and Grill Master provides a 6% vol- ume discount if Kentucky purchases at least 390 g s during 2020. On April 17, 2020, Grill Master delivered and received payment for 280 grits a on prior experience with the State of Kentucky renovation projects, the delivery of this marry gemakes it certain that Kentucky will meet the dis- count threshold. Prepare the journal entries for Gril Master for grills sold on April 17, 2020. Assume the company records sales transaction net. c. Grill Master sells its specialty combination gas/wood-fired grills to local restaurants. Each grill is sold for $1,000 (cost $550) on credit with terms 3/30, net/90. Prepare the journal entries for the sale of 20 grills on September 1, 2020, and upon payment, assuming the customer paid on (1) September 25, 2020, and (2) October 15, 2020. Assume the company records sales net. d On October 1, 2020, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local builder. The builder plans to install it in one of its "Parade of Homes" houses. Grill Master accepted a 3-year, zero interest-bearing note with face amount of $5,324. The grill has an inventory cost of $2,700. An interest rate of 10% is an appropriate market rate of interest for this customer. Prepare the journal entries on October 1, 2020, and December 31, 2020.

Answer 1

Requirement a: Prepare the journal entries as follows

Date	Account Title and Explanation	Debit	Credit
April 20	Cash	$8,000
2020	Unearned Sales Revenue		$6,588
	Unearned Service Revenue		$1,412
	To record unearned revenue
May 15	Unearned Sales Revenue	$6,588
2020	Unearned Service Revenue	$1,412
	Sales Revenue		$6,588
	Service Revenue		$1,412
	To record sales and service revenue earned
	Cost of goods sold ($425 × 10)	$4,250
	Inventory		$4,250
	To record cost of goods sold

Note: Compute sales and service revenue as follows

Item	Stand alone Price per unit	Percentage	Combined Price per unit	Allocated Price per unit	Number of Units	Total Revenue
Gas Grill	$700	82.35%	×   $800	= $658.82	× 10	= $6,588
Installation Service	$150	17.65%	× $800	= $141.18	× 10	= $1,412
Total	$850	1.00		$800.00		$8,000

Requirement b. Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
April 17	Cash	$52,640
2020	Sales Revenue		$52,640
	To record sales revenue
	Cost of goods sold ($160 × 280 Charcoal Grills)	$44,800
	Inventory		$44,800
	To record cost of goods sold

Note: Compute sales revenue net of volume discounts as follows

Particulars	Amount
Sales revenue ($200 × 280 Charcoal Grills)	$56,000
Deduct: Volume Discount ($56,000 × 6%)	($3,360)
Sales revenue net of volume discount	$52,640

Requirement c1: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
September 1	Accounts Receivable ($1,000 × 20 Grills) × (1−3%)	$19,400
2020	Sales Revenue		$19,400
	To record sales revenue
	Cost of goods sold ($550 × 20 Grills)	$11,000
	Inventory		$11,000
	To record cost of goods sold
September 25	Cash	$19,400
2020	Accounts Receivable		$19,400
	To record cash collected on account

Requirement c2: Prepare the following journal entries

Date	Account Title and Explanation	Debit	Credit
September 1	Accounts Receivable ($1,000 × 20 Grills) × (1−3%)	$19,400
2020	Sales Revenue		$19,400
	To record sales revenue
	Cost of goods sold ($550 × 20 Grills)	$11,000
	Inventory		$11,000
	To record cost of goods sold
October 15	Cash ($1,000 × 20 Grills)	$20,000
2020	Accounts Receivable ($1,000 × 20 Grills) × (1−3%)		$19,400
	Sales Discounts Forfeited ($20,000 − $19400)		$600
	To record cash collected on account

Requirement d: Prepare the following journal entry

Date	Account Title and Explanation	Debit	Credit
October 1	Notes Receivable	$5,324
2020	Discount on Notes Receivable ($5,324 − $4,000)		$1,324
	Sales Revenue		$4,000
	To record sales revenue
	Cost of goods sold	$2,700
	Inventory		$2,700
	To record cost of goods sold

December 31	Discount on Notes Receivable	$100
2020	Interest Revenue ($4,000 × 10%) × 3 ÷ 12		$400
	To record interest revenue on note receivable

Note: Compute present value of note using Excel as follows

FV	Rate	NPER	PV	Formula
$5,324	10%	3	$4,000	=PV(rate,nper,,-fv,0)