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 $31,000 at the end of each month, and, if total cost savings reach a specific target, PU will pay an additional $26,000 to Wiggins at the end of the contract. Wiggins estimates a 80% chance that cost savings will reach the target. Assume that Wiggins estimates variable consideration as the most likely amount. Requires:

Do the following for Wiggins:

A) Prepare the journal entry on July 31 to record the first month of revenue under the contract.

B) Assuming total cost savings exceed the target, prepare the journal entry, if any, on October 31 to record receipt of the $26,000 bonus (ignore the normal October payment of $31,000).

C) Assuming total cost savings do no reach the target, prepare the journal entry, if any, on October 31 to record failure to receive the $26,000 bonus (ignore the normal October payment of $31,000).

D) Assume that Wiggins estimates variable consideration as the expected value. Prepare the journal entry on July 31 to record the first month of revenue under the contract.

Answer 1

Part A

Date	General Journal	Debit	Credit
July 31	cash	31000
	Bonus receivable	5200
	Service revenue (((31000*4)+26000)*80%)+((31000*4)*20%)))÷4		36200

Part B

Date	General Journal	Debit	Credit
October 31	cash	26000
	Bonus receivable (5200*4)		20800
	Service revenue		5200

Part C

Date	General Journal	Debit	credit
October 31	service revenue	46800
	Bonus receivable		20800
	Cash		26000

Part D

Date	General Journal	Debit	Credit
July 31	cash	26000
	Expected bonus receivable	10200
	Revenue (((31000*4)+26000)*80%)+((31000*4)*20%)))/4		36200