Geraths Windows manufactures and sells custom storm windows for three-season por
ID: 2492506 • Letter: G
Question
Geraths Windows manufactures and sells custom storm windows for three-season porches. Geraths also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Geraths enters into the following contract on July 1, 2014, with a local homeowner. The customer purchases windows for a price of $3,400 and chooses Geraths to do the installation. Geraths charges the same price for the windows irrespective of whether it does the installation or not. The customer pays Geraths $1,700 (which equals the fair value of the windows, which have a cost of $1,300) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2014, Geraths completes installation on October 15, 2014, and the customer pays the balance due. Prepare the journal entries for Geraths in 2014, assuming Geraths estimates the standalone value of the installation based on an estimated cost of $420 plus a margin of 20% on cost. Prepare the journal entries for Geraths in 2014, assuming, given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the fair value of the installation.
Explanation / Answer
(a)
On September 1, 2014, Geraths has two performance obligations: (1) the delivery of the windows and (2) the installation of the windows.
Windows = $1,700
Installation = $420 + (20% X $420) = $504
Total = $1,700 + $504 = $2,204
Allocation of total revenue:
Windows = ($1,700/$2,204) X $3,400 = $2,623
Installation ($504/$2,204) X $3,400 = $777
Date
Account titles and explanation
Debit
Credit
July 01, 2014
No entry – neither party has performed under the contract.
September 01, 2014
Cash
$1,700
Accounts Receivable
$1,700
Unearned Service Revenue
$777
Sales Revenue
$2,623
September 01, 2014
Cost of Goods Sold
$1,300
Inventory
$1,300
October 15, 2014
Cash
$1,700
Unearned Service Revenue
$777
Service Revenue (Installation)
$777
Accounts Receivable
$1,700
The sale of the windows is recognized once delivered. The installation fee is recognized when the windows are installed.
(b)
If Geraths cannot estimate the costs for installation, then the residual approach is used. In this approach, the total fair value of the contract is $3,400. Given that the windows have a standalone fair value of $1,700, then $1,700 ($3,400 – $1,700) is allocated to the installation.
Date
Account titles and explanation
Debit
Credit
July 01, 2014
No entry – neither party has performed under the contract.
September 01, 2014
Cash
$1,700
Accounts Receivable
$1,700
Unearned Service Revenue
$1,700
Sales Revenue
$1,700
September 01, 2014
Cost of Goods Sold
$1,300
Inventory
$1,300
October 15, 2014
Cash
$1,700
Unearned Service Revenue
$1,700
Service Revenue (Installation)
$1,700
Accounts Receivable
$1,700
Date
Account titles and explanation
Debit
Credit
July 01, 2014
No entry – neither party has performed under the contract.
September 01, 2014
Cash
$1,700
Accounts Receivable
$1,700
Unearned Service Revenue
$777
Sales Revenue
$2,623
September 01, 2014
Cost of Goods Sold
$1,300
Inventory
$1,300
October 15, 2014
Cash
$1,700
Unearned Service Revenue
$777
Service Revenue (Installation)
$777
Accounts Receivable
$1,700
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