Question

Peachpit Software Developers shipped its accounting package to a customer on September 10, 20X1. In addition to the software, Peachpit's contract requires the company to provide: (1) training to the customer's accounting staff during October of 20X1 and again in January 20X2 when the upgrade is released—75% of the training hours are provided during October, (2) technical product support for one year starting October 1, 20X1, and (3) a major upgrade to the software early in 20X2. The customer paid the total contract price of $80,000 upon receipt of the invoice on September 17, 20X1. Peachpit would charge the following if these individual contract elements were sold separately: Accounting package (software) Training customer's staff Customer support Accounting software upgrade Totals Fair Value $ 65,000 10,000 15,000 10,000 $100,000 Required: a. Prepare a journal entry to record receipt of the cash payment. b. Determine the amount of revenue to be recognized in 20X1 and prepare the necessary journal entry.

Answer 1

Solution

Peachpit Software Developers

a. Entry to record receipt of the cash payment –

Account Titles and Explanation Debit Credit Date Sept 10, 20X1 Cash $80,000 Revenue $52,000 Unearned Revenue $28,000 (To record cash received from customer)

Computations –

Revenue portion of cash received –

The company sold accounting package (software)

Hence, revenue is recognized for accounting package

The proportion is as follows, 65,000/100,000 = 65%

Revenue recognized = 80,000 x 65% = $52,000

Unearned revenue = 80,000 – 52,000 = $28,000

a. Determination of the amount of revenue to be recognized in 20X1 and the necessary entry –

Account Titles and Explanation Debit Credit Date Dec 31, 20X1 Unearned Revenue $9,000 Revenue $9,000 (To record earned portion of unearned revenue in 20X1)

Note – The amount of $52,000 revenue relating to accounting software is earned immediately on cash payment. Hence, the same is not reported in this entry.

The total revenue earned in 20X1 = 52,000 + 9,000 = $61,000

Computations-

Allocation of contract price to compute revenue earned in 20X1 –

Allocation of contract price -

Accounting Package (software) = 80,000 x 65% = $52,000

Training Customer’s Staff = 80,000 x 10% = $8,000

Customer Support = 80,000 x 15% = $12,000

Accounting Software Upgrade = 80,000 x 10% = $8,000

Revenue earned in 20X1 –

Accounting Package (Software) = $52,000

Training Customer’s Staff (75% in October) = 75% x 8,000 = $6,000

Customer Support, 3 months in 20X1 (Oct 1 – Dec 31) = $12,000 x 3/12 = $3,000

Since, Revenue on accounting package has already been recognized in the first journal entry, the earned portion of unearned revenue is recognized in this entry.

Also, the $8,000 relating to Software Upgrade is recognized when the upgrade is provided in early 20X2. Likewise, the unearned revenue relating to training (25% x 8,000 = 2,000) and the customer support (9 months, 12,000 x 9/12 = 9,000) would be recognized in 20X2.