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home / study / questions and answers / business / accounting / velocity, a consulting firm, enters into a contract ... 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 $54,000 at the beginning of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $18,000 or will be entitled to an additional $18,000 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 $18,000 bonus and calculates the contract price based on the expected value of future payments to be received. After four months, 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 $18,000. 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.)
Explanation / Answer
1) Accounts recievable --------- $54,000
To Deferred Revenue $54,000
2) Deferred revenue ($54,000*1/2)----------$27,000
Bonus recievable ($18,000*1/2)..................9,000
To Service Revenue $36,000
3) after four months probability decreased to 60% so 9000/80 *60 = $6750
(9000 - $6750= $2250)
Service revenue $2250
To Bonus recievable $2250
3) Deferred revenue ...................$27,000
Bonus recievable ...........................15,750
To Sales revenue $42,750
4) Cash .............$18,000
To Bonus recievable $18,000
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