Answer:
the journal entries:
to record the contract
Dr Accounts receivable 96,000
Dr Bonus receivable 2,400
Cr Service revenue 98,400
to record adjustment of bonus receivable at month 5:
Dr Service revenue 6,400
Cr Bonus receivable 6,400
to record service revenue for the fifth month:
Dr Accounts receivable 96,000
Dr Bonus receivable 800
Cr Service revenue 96,800
to record getting the bonus:
Dr Cash 32,000
Cr Bonus receivable 6,400
Cr Service revenue 25,600
Explanation:
total value of the contract:
[($96,000 x 8) + $32,000] x 0.8 = $640,000
[($96,000 x 8) - $32,000] x 0.2 = $147,200
total expected value = $787,200
expected value of the bonus = $787,200 - ($96,000 x 8) = $19,200, monthly bonus receivable $19,200 / 8 = $2,400
the adjustments required during the fifth month:
[($96,000 x 8) + $32,000] x 0.6 = $480,000
[($96,000 x 8) - $32,000] x 0.4 = $294,400
total expected value = $774,400
expected value of the bonus = $774,400 - ($96,000 x 8) = $6,400, monthly bonus receivable $6,400 / 8 = $800
