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

Basic Journal entries

Debit ($) 8,75,000 3,85,000 14,40,000 5,28,000 Date General Journal 15-Jan Cash 15-Jan Sales Revenue 15-Jan Cost of Goods Sold 15-Jan Inventory 01-Mar Cash 01-Mar Sales Revenue 01-Mar Unearned Maintenance Revenue 01-Mar Cost of Goods Sold 01-Mar Inventory 15-Apr Sales Revenue 15-Apr Cash 15-Apr Inventory 15-Apr Cost of Goods Sold 01-Jul Cash 01-Jul Unearned Maintenance Revenue 31-Dec Unearned Maintenance Revenue 31-Dec Maintenance service revenue 31-Dec Unearned Maintenance Revenue 31-Dec Maintenance service revenue Credit ($) Narration 175 Pieces of Equipment sold @ $ 5000/unit 8,75,000 175 Pieces of Equipment sold @ $ 5000/Unit 175 Pieces of Equipment sold with cost @ $ 2200/unit 3,85,000 175 Pieces of Equipment sold with cost @$ 2200/Unit 240 Pieces sold @ 6000/contract 12,00,000 240 Piece 5,000/Unit 2.40,000 Malitenenace fee of 1.000/unit 240 Pieces of Equipment sold with cost @$ 2200/unit 5,28,000 240 Pieces of Equipment sold with cost @ $ 2200/Unit 123 Pieces sold now returned 1,15,000 23 Pieces sold now returned 23 Pieces sold now returned 50,600 23 Pieces sold now returned 120 Contracts for 3 Years Maintenance 1,44,000 120 Contracts for 3 Years Maintenance Proportiante revenue for the contract entered on 1 March recognized 66,667 Proportiante revenue for the contract entered on 1 March recognized Proportiante revenue for the contract entered on 1 Jul recognized 24,000 Proportiante revenue for the contract entered on 1 Jul recognized 1,15,000 50,600 1,44,000 66,667 24,000

Gross Profit determination journal entries

Date General Journal Debit ($) 31-Dec Sales Revenue 19,60,000 31-Dec Maintenance service revenue 90,667 Credit ($) Narration Revenue and expenses transferred to profit & loss Account to determine Gross Profit Revenue and expenses transferred to Profit & loss Account to determine Gross Profit Revenue and expenses transferred to profit & loss Account to determine 8,62,400 Gross Profit Revenue and expenses transferred to profit & loss Account to determine 11,88,267 Gross Profit 31-Dec Cost of Goods Sold 31-Dec Profit & Loss Account