On July 1, Wiggins Associates enters into a contract to provide consulting servi

Question

On July 1, Wiggins Associates enters into a contract to provide consulting services to Pennsylvania University (PU). The contract is anticipated to last four months and is intended to achieve significant cost savings at the university. The contract stipulates that PU will pay Wiggins $25,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $20,000 to Wiggins at the end of the contract. Wiggins estimates a 75% chance that cost savings will reach the target. Assume that Wiggins estimates uncertain consideration as the most likely amount. Required: Do the following for Wiggins: a. Prepare the journal entry on July 31 to record the first month of revenue under the contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) b. Assuming total cost savings exceed the target, prepare the journal entry, if any, on October 31 to record receipt of the $20,000 bonus (ignore the normal October payment of $25,000). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Solution:

1. The most likely amount received under the contract is 4 x $25,000 + $20,000 = $120,000 since there is 75% chance that $20,000 payment will be received. Hence, each month Wiggins would recognize $120,000/4 = $30,000 of revenue. The journal entry is

Cash 25,000

Bonus receivable                                 5,000

Revenue 30,000

2. After four months, the expected bonus receivable will have accumulated to $20,000 (4 x $5,000). If Wiggins receives the bonus, it will make the following entry:

Cash 20,000

Bonus receivable                                 20,000

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