Question

ABC Corporation sells industrial equipment. The equipment can be
sold independently or combined with maintenance service. In addition, ABC
provides maintenance service independently from the sale of the equipment.
During 2019 the following transactions take place:
1. On January 15, 175 pieces of equipment are sold. The selling price of the
equipment is €5,000 per unit, while the acquisition cost of equipment to ABC
is €2,200 per unit.
2. On Mach 1, 240 pieces of equipment combined with 3 years maintenance are
sold. The combined price for equipment and the 3-year maintenance service is
€6,000 per sale contract. The stand-alone price of the equipment is €5,000 per unit, while the acquisition cost of equipment to ABC is €2,200 per unit. The
maintenance service is sold independently for €1,200 per service contract.
3. On April 15, 23 pieces of equipment sold independently on January 15
(transaction 1) are returned from the customers. Although the firm does not
adopt a refund policy, in this case fully refunds its customers.
4. On July 1, ABC signed 120 contracts to provide 3 years maintenance services.
The stand-alone price of the maintenance contract is €1,200.
5. The net realizable value of ending inventory at December 31, 2019 is €4,200
per unit.

Required: Prepare the journal entries that correspond to the above transactions. In
addition, prepare the journal entry for the determination the gross profit of ABC for
2019. Assume that all transactions are in cash. ABC’s accounting period starts on
January 1 and ends on 31 December of each year.
Additional information:
-The firm uses a perpetual inventory system.
- Assume that the maintenance service is provided linearly during the 3 years period.

Answer 1

The journal entries:

On January 15,

Debtors account Debit 875000

Sale of equipments Credit 875000

COGS account Debit 385000

Equipments account Credit 385000

On March 1, it is assumed that the maintenance service revenue is accrued once every year.

Debtors account Debit 1266667

Sale of equipment Credit 1200000

Sale of maintenance service Credit 66667

COGS account Debit 528000

Equipments account Credit 528000

On April 15,

Sales return (equipment) Debit 115000

Debtors account Credit 115000

Equipments account Debit 50600

COGS account Credit 50600

On July 1,

Debtors account Debit 24000

Sale of maintenance service Credit 24000

On December 31,

Depending upon the closing inventory quantity, Equipments account will be debited and Other Comprehensive Income account will be credited for the net realisable value being $ 2000 per unit above $ 2200 per unit purchase price.

Sale of Equipment Debit 2075000

Sale of maintenance service Debit 90667

COGS account Credit 862400

Sales return (equipment)   Credit 115000

Gross Profit Credit 1188267

It is assumed that the actual expenditure on maintenance contracts mentioned in the question is nil as no expense information provided.