Question

Finally, under the contract, TBG agreed to pay YANA:

$6,000,000 due upon signing the contract on 1/1/2018

$3,000,000 due on 6/30/2018

$4,400,000 plus any completion bonus or minus any completion penalty at the time the security system first becomes operational, and

Five annual payments of $120,000 each for five years beginning on the first anniversary of the day the security system first became operational and continuing for the next four years.

The payment schedule does not confer a significant benefit of financing on either YANA or TBG.

B. Prepare Journal Entries that would be made at the following dates using the Journal Entry Template:

On January 2, 2018, the date the contract was signed, commission paid, and first payment received from YANA.

On June 30, 2018 when the second payment from YANA was received. Include in your journal entries any other recognition events, circumstances or transactions that occurred during the six months ended June 30, 2018 not recorded in 1 above.

On December 31, 2018 when you will assume the security system became operational, control of the system is given to TBG, and the third cash payment is received. You should include in your journal entries any other recognition events, circumstances or transactions that will occur during the six months ended December 31,2018.

On December 31, 2019 when the fourth cash payment from TBG was received. You should include in your journal entries any other recognition events, circumstances or transactions that will during the six months ended December 31,2019.

Answer 1

	When contract was signed
02-01-2018	Bank		Dr.	$ 6000000
	YANA		Cr.	$ 6000000
	(Being payment received from YANA)
Note: Payment received from YANA will be treated as advance until the possession, title and risk of damage transferred to YANA.
30-06-2018	Bank		Dr.	$ 3000000
	YANA		Cr.	$ 3000000
	(Being second payment received from YANA)
Event: Percent of work as agreed at the time of contract might be get completed say 40-50%.
31-12-2018	Bank		Dr.	$ 4400000
	YANA		Cr.	$ 4400000
	(Being second payment received from YANA)
Event: Security system is now operational. Risk of damage, possession and title say reward has been transferred to YANA.
Now we can record revenue from the contract.
Two options are available with us.
First option:-
Firstly recognise the total value of Contract say $ 6000000+$3000000+$4400000+$120000*5
i.e.	14000000
entry would be
31-12-2018	YANA		Dr.	$ 14000000
	Revenue		Cr.	$ 14000000
	(Being Revenue recognised)
	On receipt of Payment from YANA
31-12-2019	Bank		Dr.	$ 120000
	YANA		Cr.	$ 120000
	( Being payment received)
Event: Performance based payment. Same entry will be done every year for four years.
Second option:-
Recognise payment received from 01/01/2018 to 31/12/2018 as Revenue say $6000000+$3000000+$4400000
i.e.	13400000
entry would be
31-12-2018	YANA		Dr.	$ 13400000
	Revenue		Cr.	$ 13400000
	(Being Revenue recognised)
	On receipt of Payment from YANA
31-12-2019	Bank		Dr.	$ 120000
	Revenue		Cr.	$ 120000
	( Being payment received)
Event: Performance based payment. Same entry will be done every year for four years.
Note: This is done becuase payment may include a condition that can be based on performance. Its like warranty. I mean that YANA may have reserved the right to deduct payment if security system is not working properly so the revenue depends on the performance of security system, so should be recognised only when there is certainity involved to received the payment.