Question

Geraths Windows manufactures and sells custom storm windows for three-season porches. Geraths also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Geraths enters into the following contract on July 1, 2014, with a local homeowner. The customer purchases windows for a price of $2,400 and chooses Geraths to do the installation. Geraths charges the same price for the windows irrespective of whether it does the installation or not. The price of the installation service is estimated to have a fair value of $600. The customer pays Geraths $2,000 (which equals the fair value of the windows, which have a cost of $1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2014, Geraths completes installation on October 15, 2014, and the customer pays the balance due. Prepare the journal entries for Geraths in 2014. (Round amounts to nearest dollar.)BE18-12.Refer to the revenue arrangement in BE18-11. Repeat the requirements, assuming (a) Geraths estimates the standalone value of the installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the fair value of the installation. (Round amounts to nearest dollar.)

Answer 1

Solution and Explanation:

a. Prepare the journal entries for Geraths in 2014.

On July 1, 2014, Geraths enters into a contract with a customer for the purchase and installation of window for a price of $2,400. No journal entry.

On september 1, 2015.

Windows     = $2,000

Installation    = $600

Total             = $2,600

Allocation

Particulars                                                 Amount

Installation $(\ 600 / \ 2,600) \times \ 2,400$                 554

Windows $(\ 2,000 / \ 2,600) \times \ 2,400$               1,846

Revenue recognized                                        2,400

Date  Account details                                      Debit       Credit

Sep 1,2015  Cash                                          2,000  

Account receivable                                     400  

unearned service revenue                                            554

Sales revenue                                                           1846

Cost of goods sold                                       1100  

Inventory                                                                    110    

15 oct,2015  Cash                                            400  

unearned service revenue                               554  

Service revenue (installation)                                      554

Account receivable                                                       400

(Revenue recognized after service provided)

On september 1,2015.

Windows    = $2,000

Installation $(\ 400+(20 \% \times 400)$ = $480

Total                                           = $2,480

Allocation.

sales revenues  200,000

Particulars                                                    Amount

Installation                                                             465

Windows                                                             1,935

Revenue recognized                                             2,400

Date  Account details                             Debit             Credit

Sep 1,2015  Cash                                   2,400  

Account receivable                              400  

unearned service revenue                                         465

Sales revenue                                                         1935

Cost of goods sold                             1100  

Inventory                                                                   1100

(Windows delivered,Instailation recorded )    

15 oct,2015  Cash                                           400  

unearned service revenue                             465  

Service revenue (installation)                                      465

Account receivable                                                       400

(Revenue recognized after service provided)