Question

help

On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $44,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $22,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $22,000 to Green Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received. Required: Prepare the following journal entries for Revis: 1. to 3. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month's revenue, assuming total cost savings exceed target, record the entry on June 30 for receipt of the bonus and assuming total cost savings fall short of target and record the entry on June 30 for payment of the penalty. (If no entry is required for a transaction/event, select "No Journal entry required" in the first account field.)

Answer 1

Answer-If the cost saving meet the specified target, total contract revenue would be:-

($44,000*6)+$22,000= $286,000

If the cost saving do not meet the specified target, total contract revenue would be:-

($44,000*6)-$22,000= $242,000

The expected contract price:-

Possible Prices	Probability	Expected Revenue
$286,000	80%	228,800
$242,000	20%	48,400
Expected contract price at the inception		$277,200

Revenue of each month= $277,200/6= $46,200

The journal entry to record the collection of cash and recognition of first month 's revenue should be prepared as follows:-

Date	Account Titles	Debit ($)	Credit ($)
Jan.31	Cash	44,000
	Expected Bonus Receivable	2,200
	Service Revenue		46,200

The journal entry to record the receipt of bonus on June 30 should be prepared as follows:-

Date	Account Titles	Debit ($)	Credit ($)
June 30	Cash	22,000
	Expected Bonus Receivable ($2,200*6)		13,200
	Service Revenue		8,800

The journal entry to record payment of penalty on June 30 should be prepared as follows:-

Date	Account Titles	Debit ($)	Credit ($)
June 30	Service Revenue	35,200
	Expected Bonus Receivable ($2,200*6)		13,200
	Cash		22,000