3. 15 pts On January 1 Edwards Consulting entered into a contract to complete a

Question

3. 15 pts On January 1 Edwards Consulting entered into a contract to complete a cost reduction program for Matthews Financial over a six-month period. Edwards will receive $20,000 from Matthews at the end of each month. If total cost savings reach a specific target, Edwards will receive an additional $10,000 from Matthews at the end of the contract, but if total cost savings fall short, Edwards will refund $10,000 to Matthews. Edwards 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 following journal entries for Edwards: 1. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month's revenue. 2. Assuming total cost savings exceed target, prepare the journal entry orn June 30 to record receipt of the bonus. 3. Assuming total cost savings fall short of target, prepare the journal entry on June 30 to record payment of penalty.

Explanation / Answer

Date Particulars Debit Credit 1) 31-Jan Cash $ 20,000.00 Expected Bonus receivable $     1,000.00 Service Revenue (Working) $ 21,000.00 Working: Contract Revenue If total cost saving meet ($20,000*6)+$10,000 = $130,000. If total cost saving not meet ($20,000*6)-$10,000 = $110,000. Total cost Probability Expected Revenue $130,000 80% $104,000 $110,000 20% $22,000 Total contract cost $126,000 Revenue for each month $126,000/6 months = $21,000. 2) 30-Jun Cash $ 10,000.00 Expected Bonus receivable $     6,000.00 ($1000*6 Month) Service Revenue $     4,000.00 3) 30-Jun Cash $ 16,000.00 Expected Bonus receivable $     6,000.00 Service Revenue $ 10,000.00

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