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 $36,000 at the beginning of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $12,000 or will be entitled to an additional $12,000 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 $12,000 bonus and calculates the contract price based on the expected value of future payments to be received. After four months, 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 $12,000.
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.)

1.Prepare the entry to record revenue each month for the first four months of the contract.
2. Prepare the entry after four months to recognize the change in estimate associated with the reduced likelihood that the $12,000 bonus will be received.
3. Prepare the entry to record revenue each month for the second four months of the contract.
4. Prepare the entry after eight months to record receipt of the $12,000 bonus

Answer 1

Answer:

1. Debit Bank $36000, Credit Revenue $36000  ( same entry for all four months)

2. No journal entry require

3. Debit Bank $36000, Credit Revenue $36000 ( same entry for all four months)

4. Debit Bank $12000 , Credit Bonus receivable $12000

Explanation:

As soon Velocity enters into the contract he is obligated to provide the consulting services and since this is a contract for rendering services and payments will be made regardless of Velocity helping to increase sales level or not but Velocity will receive the monthly payments therefore He has earned the Revenue immediately. The conditions do not require Velocity to pay back the monthly payments if Burger Boy sales do not increase so no liability created.

upon entering the contract it was stated that if Velocity increases Sales for Burger Boy then it will receive a bonus of $12000 journal entry

Debit Bonus receivable $12000, Credit Bonus income

If Velocity fails to increase then

Debit contract refund $12000, Credit Refund payable

at the end of the contract Received the bonus

Debit Bank $12000, Credit Bonus receivable $12000