Question

Testbank Exercise 127 Blue Windows manufactures and sells custom storm windows for enclosed porches. Blue also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be provided by other vendors. Blue enters into the following contract on June 1, 2021, with a local homeowner. The customer purchases windows for a price of $5,540 and chooses Blue to do the installation. Blue charges the same price for the windows irrespective of whether it does the installation or not. The price of the installation service is estimated to have a fair value of $1,260. The customer pays Blue $5,040 (which equals the fair value of the windows, which have a cost of $2,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on August 1, 2021, Blue completes installation on September 15, 2021, and the customer pays the balance due. (Round amounts to nearest dollar.) Prepare the journal entries for Blue in 2021. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit (To record windows delivered) (To record cost of goods sold) Click if you would like to Show Work for this question: Open Show Work

Answer 1

Amounts are in $

Standalone rate of installation = 1,260

Standalone rate of windows = 5,040

Total of standalone prices = 6,300

Price allocated to Installation = 5,540 x 1,260/6,300

= 1,108

Price allocated to Windows = 5,540 x 5,040/6,300

= 4,432

These two are two different performance obligations

Journal Entries

On June 1, 2021

No Entry

On August 1, 2021

Cash $5,040

Accounts receivable $500

Sales Revenue $4,432

Unearned service revenue $1,108

(The revenue of sale of windows recognised and the instalment revenue is deferred)

On August 1, 2021

Cost of goods sold $2,100

Inventory $2,100

(Cost of goods sold on the windows sold is accounted)

On September 15, 2021

Cash $500

Unearned service revenue $1,108

Service revenue (installation) $1,108

Accounts receivable $500

(Installation service rendered and the balance amount receives)

(We have accounted this as a compound entry, where two entries are merged as one. Alternatively we can account two separate entries)