Question

Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $63,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $21,000 or will be entitled to an additional $21,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $21,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $21,000.

Required:
1. to 4. Prepare the journal entries related to the contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Journal entry worksheet 1 2 3 4 Record the entry to record revenue each month for the first four months of the contract. Note: Enter debits before credits. Transaction General Journal Debit Credit Record entry Clear entry View general journal

Answer 1

The required journal entries are shown as follows:- (Amounts in $)

Transaction	General Journal	Debit	Credit
1	Accounts Receivable	63,000
	Bonus Receivable (See note 1 below)	1,575
	Service Revenue (63,000+1,575)		64,575
	(To record revenue per month for first four months)
2	Service Revenue (see note 2 below)	4,200
	Bonus Receivable [(1,575-525)*4 months]		4,200
	(To record change in estimate at the start of fifth month)
3	Accounts Receivable	63,000
	Bonus Receivable (See note 2 below)	525
	Service Revenue (63,000+525)		63,525
	(To record revenue per month for second four months)
4)	Cash	21,000
	Bonus Receivable		4,200
	Service Revenue (21,000-4,200)		16,800
	(To record the receipt of bonus of $21,000)

Notes:-

1) Calculation of estimated revenue at the start of first month (Amounts in $)

Possible Prices (A)	Probability (B)	Estimated Consideration (A*B)
[(63,000+8)+21,000] = 525,000	80%	420,000
[(63,000+8)-21,000] = 483,000	20%	96,600
Total		516,600

Bonus amount in the estimated consideration = $516,600 - ($63,000*8)

= $516,600 - $504,000 = $12,600

Bonus receivable to be recognized per month = $12,600/8 months = $1,575 per month

2) Calculation of estimated revenue at the start of fifth month (Amounts in $)

Possible Prices (A)	Probability (B)	Estimated Consideration (A*B)
[(63,000+8)+21,000] = 525,000	60%	315,000
[(63,000+8)-21,000] = 483,000	40%	193,200
Total		508,200

Bonus amount in the estimated consideration = $508,200 - ($63,000*8)

= $508,200 - $504,000 = $4,200

Bonus receivable to be recognized per month = $4,200/8 months = $525 per month

Adjustment for bonus recognized for first four months = ($1,575-$525)*4 months = $4,200