BE18-1 Leno Computers manufactures tablet computers for sale to

retailers such as Fallon Electronics. Recently, Leno sold and delivered 200
tablet computers to Fallon for $20,000 on January 5, 2017. Fallon has agreed
to pay for the 200 tablet computers within 30 days. Fallon has a good credit
rating and should have no difficulty in making payment to Leno.
(a) Explain whether a valid contract exists between Leno Computers and
Fallon Electronics.
Yes, a valid contract exists:
1. The contract has commercial substance, Leno delivered the
computers, which will increase the assets of Fallon and Fallon will
pay $20,000 in thirty Leno increasing Leno’s revenues and
decreasing Leno’s cash.
2. Both parties appear to have agreed to the contract and agreed
upon a payment date. Leno has delivered the computers and Fallon
has agreed to specific terms.
3. Fallon has the rights to receive the computers and Leno has the
right to get paid for said computers.

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4. The payment terms are clearly stated: Fallon will pay $20,000

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within 30 days.

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5. Fallon has a good credit rating and Leno should have no problem

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gaining payment.

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(b) Assuming that Leno Computers has not yet delivered the tablet
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computers to Fallon Electronics, what might cause a valid contract not to
exist between Leno and Fallon?
1. If Fallon’s situation changes and cannot make the agreed upon
payment.
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2. If something should occur to make one party not complete their

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part of the contract the contract could become invalid.

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BE18-2 On May 10, 2017, Cosmo Co. enters into a contract to deliver a
product to Greig Inc. on June 15, 2017. Greig agrees to pay the full contract
price of $2,000 on July 15, 2017. The cost of the goods is $1,300. Cosmo
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delivers the product to Greig on June 15, 2017, and receives payment on July
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15, 2017. Prepare the journal entries for Cosmo related to this contract.
Either party may terminate the contract without compensation until one of
the parties performs.
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June 15, 2017

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2,000.0
Accounts Receivable 0
2,000.0
Sales Revenue 0
sh

1,300.0
COGS 0
1,300.0
Inventory 0
To Record Sale of Goods to
Greig Inc.

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 July 15, 2017
2,000.0
Cash 0
Accounts Receivable 2,000.00
To record receipt of Cash from
Greig Inc.

BE18-3 Hillside Company enters into a contract with Sanchez Inc. to

provide a software license and 3 years of customer support. The customer-
support services require specialized knowledge that only Hillside Company's
employees can perform. How many performance obligations are in the
contract?
One, it appears that the customer support and software are not
distinct and also interdependent. The goal of this contract appears
not only to provide the software but, in addition support that can
only be provided by Hillside. Sanchez needs Hillside support to use

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the specialized program so there is only one obligation in this
contract.

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BE18-6 Nair Corp. enters into a contract with a customer to build an

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apartment building for $1,000,000. The customer hopes to rent apartments
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at ·the beginning of the school year and provides a performance bonus of
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$150,000 to be paid if the building is ready for rental, beginning August 1,
2018. The bonus is reduced by $50,000 each week that completion is
delayed. Nair commonly includes these completion bonuses in its contracts
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and, based on prior experience, estimates the following completion

outcomes:
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Probabil
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Completed by
ity
August 1, 2018 70%
August 8, 2018 20%
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August 15, 2018 5%

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After August 15,

5%
2018
Determine the transaction price for this contract.
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As Nair has performed a large number of contracts similar and can

predict the probabilities of outcomes, which are discrete, it should
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use the Expected Value Method.

Probabi Total Expected

Date lity Base Pay Bonus Bonus Total % Total
sh

1,000,00 1,150,00
August 1, 2018 70% 0 150,000 150,000 0 805,000
1,000,00 1,100,00
August 8, 2018 20% 0 150,000 100,000 0 220,000
1,000,00 1,050,00
August 15, 2018 5% 0 150,000 50,000 0 52,500

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 After August 15, 1,000,00 1,000,00
2018 5% 0 150,000 0 0 50,000
1,127,50
0

BE18-7 Referring to the revenue arrangement in BE18-6, determine the

transaction price for the contract, assuming.

1. Nair is only able to estimate whether the building can be completed by

August 1, 2018, or not (Nair estimates that there is a 70% chance that the
building will be completed by August 1, 2018).

If Nair has limited information and cannot reasonably estimate it

must use the Most Likely Amount Method. Nair in this case would
determine the transaction price to be $1,150,000 as it expects that
there is a 70% chance it can complete the job on time.

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2. Nair has limited information with which to develop a reliable estimate of
completion by the August 1, 2018, deadline.

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If Nair cannot estimate, a constraint exists and Nair cannot fully

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estimate the price until the completion of the project. Upon
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completion of the project, Nair will recognize the revenue but not
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before.

E18-4 (Determine Transaction Price) Jupiter Company sells goods to

Danone Inc. by accepting a note receivable on January 2, 2017. The goods
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have a sales price of $610,000 (cost of $500,000). The terms are net 30. If
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Danone pays within 5 days, however, it receives a cash discount of $10,000.

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Past history indicates that the cash discount will be taken. On January 28,
2017, Danone makes payment to Jupiter for the full sales price.

Instructions
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1. Prepare the journal entry(ies) to record the sale and related cost of goods
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sold for Jupiter Company on January 2, 2017, and the payment on January
28, 2017. Assume that Jupiter Company records the January 2, 2017,
transaction using the net method.
January 2, 2017
is

600,000
Th

Note Receivable .00

600,000
Sales Revenue .00
500,000
sh

COGS .00
500,000
Inventory .00
To record the sale
January 28, 2017
Cash 610,000

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 .00
600,000
Note Receivable .00
10,000.
Sales Discount Forfeited 00
To record the receipt of money after
discount period

2. Prepare the journal entry(ies) to record the sale and related cost of goods
sold for Jupiter Company on January 2, 2017, and the payment on January
28, 2017. Assume that Jupiter Company records the January 2, 2017,
transaction using the gross method.

January 2, 2017
610,000
Accounts Receivable .00

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610,000
Sales Revenue .00

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500,000
COGS .00

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500,000
Inventory rs e .00
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To record the sale
January 28, 2017
610,000
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Cash .00
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610,000
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Accounts Receivable .00

To record the receipt of money after
discount period
If, payment were to be received in the
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discount period:
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January 3, 2017
600,000
Cash .00
10,000.
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Sales Discount 00
610,000
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Accounts Receivable .00

sh

E18-5 (Determine Transaction Price) Jeff Heun, president of Concrete

Always, agrees to construct a concrete cart path at Dakota Golf Club.
Concrete Always enters into a contract with Dakota to construct the path for
$200,000. In addition, as part of the contract, a performance bonus of
$40,000 will be paid based on the timing of completion. The performance
bonus will be paid fully if completed by the agreed-upon date. The
performance bonus decreases by $10,000 per week for every week beyond

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 the agreed-upon completion date. Jeff has been involved in a number of
contracts that had performance bonuses as part of the agreement in the
past. As a result, he is fairly confident that he will receive a good portion of
the performance bonus. Jeff estimates, given the constraints of his schedule
related to other jobs, that there is 55% probability that he will complete the
project on time, a 30% probability that he will be 1 week late, and a 15%
probability that he will be 2 weeks late.
Instructions

1. Determine the transaction price that Concrete Always should compute for
this agreement.
$234,000
Probabi Base Expected Weighted
Date lity Pay Bonus Total Total
Date Agreed 200,00
Upon 55% 0 40,000 240,000 132,000
200,00

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One Week Late 30% 0 30,000 230,000 69,000

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200,00

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Two Weeks Late 15% 0 20,000 220,000 33,000

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234,000

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2. Assume that Jeff Heun has reviewed his work schedule and decided that it
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makes sense to complete this project on time. Assuming that he now
believes that the probability for completing the project on time is 90% and
otherwise it will be finished 1 week late, determine the transaction price.
o

$ 239,000
Probabi Base Expected Weighted
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Date lity Pay Bonus Total Total

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Date Agreed 200,00

Upon 90% 0 40,000 240,000 216,000
200,00
One Week Late 10% 0 30,000 230,000 23,000
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239,000
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E18-12 (Allocate Transaction Price) Shaw Company sells goods that cost
$300,000 to Ricard Company for $410,000 on January 2, 2017. The sales
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price includes an: installation fee, which has a standalone-selling price of

$40,000. The standalone selling price of the goods is $370,000. The
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installation is considered a separate performance obligation and is expected

to take 6 months to complete.
Instructions
1. Prepare the journal entries (if any) to record the sale on January 2, 2017.
sh

370,000
Amount Allocate to Equipment .00
40,000.
Amount Allocated to Installation 00
January 2, 2017
Accounts Receivable 410,000

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 .00
370,000
Sales Revenue .00
40,000.
Unearned Service Revenue 00
To record sale and obligation to install equipment

2. Shaw prepares an income statement for the first quarter of 2017, ending
on March 31, 2017 (installation was completed on June 18, 2017). How
much revenue should Shaw recognize related to its sale to Ricard?
End of First Quarter
Sales Revenue recognized will be $370,000
(Revenue for Installation will be recognized after
the 6-month period)

E18-13 (Allocate Transaction Price) Crankshaft Company manufactures

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equipment. Crankshaft's products range from simple automated machinery

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to complex systems containing numerous components. Unit selling prices

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range from $200,000 to $1,500,000 and are quoted inclusive of installation.

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The installation process does not involve changes to the features of the
equipment and does not require proprietary information about the

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equipment in order for the installed equipment to perform to specifications.
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Crankshaft has the following arrangement. With Winkerbean Inc.
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o Winkerbean purchases equipment from Crankshaft for a price
of $1,000,000 and contracts with Crankshaft to install the
equipment. Crankshaft charges the same price for the
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equipment irrespective of whether it does the installation or

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not. Using market data, Crankshaft determines installation

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service is estimated to have a standalone-selling price of

$50,000. The cost of the equipment is $600,000.
o Winkerbean is obligated to pay Crankshaft the $1,000,000 upon the delivery and 
installation of the equipment.
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Crankshaft delivers the equipment on June 1, 2017, and completes the installation of the equipment on 
September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the 
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installation: are two distinct performance obligations, which should be accounted for separately.

Instructions
1. How should the transaction price of $1,000,000 be allocated among the service obligations?
is
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Stand Alone % of Weighted

Price Total Price
Amount Allocated to
Equipment 1,000,000.00 0.9524 952,380.95
sh

Amount Allocated to
Installation 50,000.00 0.0476 47,619.05
1,000,000.
1,050,000.00 00

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 2. Prepare the journal entries for Crankshaft for this revenue arrangement on June 1,2017 and September 
30, 2017, assuming Crankshaft receives payment when installation is completed.

1,000,000.0
Accounts Receivable 0
952,380
Sales Revenue (Equipment) .95
Unearned Service Revenue 47,619.
(Installation) 05
Cost of Goods Sold 600,000.00
600,000
Inventory .00
To Record Sale and Installation
Obligation
September 30, 2017
1,000,000.0
Cash 0

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1,000,0
Accounts Receivable 00.00

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Unearned Service Revenue
(Installation) 47,619.05

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47,619.
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Service Revenue 05
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E18­16 EXCEL (Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool 
sets at a price of $50 each (cost $30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to 
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return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2)
the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a 
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profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.
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Instructions
1. Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 
2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements).
Steele believes the original estimate of returns is correct.
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March 10, 2017

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Accounts Receivable (200 x $50) 10,000.00

10,000.
Sales Revenue 00
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Cost of Goods Sold (200 x $30) 6,000.00

6,000.0
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Inventory 0
To record sale of 200 units
March 25, 2017
Sales Returns and Allowances (6 x
sh

$50) 300.00
Accounts Receivable 300.00
Returned Inventory (6 x $30) 180.00
Cost of Goods Sold 180.00
To record return of 6 units

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 March 31, 2017
Sales Returns and Allowances (4 x
$50) 200.00
Allowance for Sales Returns
and Allowances 200.00
Estimated Inventory Returns (4 x
$30) 120.00
Cost of Goods Sold 120.00
To record expected return of 4
additional units

2. Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the 
information related to the Barr sales transaction.
Income Statement
Sales Revenue 10,000.00
Less: Sales Returns and Allowances

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(300 +200) 500.00

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Net Sales 9,500.00

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Cost of Goods Sold (6,000 - 180 -

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120) 5,700.00
Gross Profit 3,800.00

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Balance Sheet
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Accounts Receivable (10,000 - 300) 9,700.00
Less: Allowance for Sales Returns
and Allowances 200.00
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Net Accounts Receivable 9,500.00

aC s

Returned Inventory (10 * $30) 300.00

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ed d
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is
Th
sh

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