On January 1 Revis Consulting entered into a contract to complete a cost reducti

Question

On January 1 Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $36,800 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $18,400 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $18,400 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received.

Required:

Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue, assuming total cost savings exceed target, record the entry on June 30 for receipt of the bonus and assuming total cost savings fall short of target and record the entry on June 30 for payment of the penalty. (If no entry is required for a particular transaction/event, select "No journal entry required" in the first account field.)

On January 1 Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $36,800 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $18,400 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $18,400 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received.

Explanation / Answer

Possible prices Probability Expected consideration $239,200(220,800(36800*6)+18400) 80% 191360 $202,400(220800-18400) 20% 40480 231840 first month's revenue =231840/6=                       38,640 cash 36800 Expected Bonus revenue                         1,840                        revenue                                     38,640 Expected bonus revenue=$1840*6 11040 b)if R receives bonus, it will recoed the following entry: Cash 18400 Expected bonus revenue=$1840*6 11040 revenue 7360 c) if revis pays the penalty , it will record the following entry; revenue 29440 Expected bonus revenue=$1840*6 11040 cash 18400

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