Question

Velocity, a consulting firm, enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $72,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $24,000 or will be entitled to an additional $24,000 bonus, depending on whether sales at Burger Boy at year-end have increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $24,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, circumstances change, and Velocity revises to 60% its estimate of the probability that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $24,000. Required: 1. to 4. Prepare the journal entries related to the contract. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet < 1 2 3 4 Record the entry to record revenue each month for the first four months of the contract. Note: Enter debits before credits. Transaction Debit Credit General Journal Deferred revenue - coupon Bonus receivable

Answer 1

Credit $ 73,800 $4,800 DY $72,600 Answer: 184) Journal entries Date particulars LF Debit Accounts Receivable Ale $ 72,000 Bonds Receivable Ale $1800 To service reveuve Service Revenue Ale 6580800-$575.000) os $4,800 TO Bonus Receivable 3. Accounts Receivable Ale $ 72,000 $ 600 Bonus Receivable Ale [$4,800/s] or To Service Revenue 4. Cash Ale - or $24,000 TO Bonus Receivable To Service seventie working Notes: D($ 72,000 *& +$24,000) 80% = $480,000 {$72,000x8-$24,000) 20% = $110,400 $590,400 Service Revenue = $ 590,400/2 = $ 73,800 velocity is guaranteed to receive = $72,000 Balance = $73,800-$ 72,000) = $1,800 $ 4,800 $19,200 2) ($72,000x8+$24,000) 60% = $360,000 ($72,000 X 8-$ 24,000) 40% . $220,800 $580,800 $72,000 *8: $ 576,000 $580,800 - $ 576,600 = $4,800