Question

Nike received a $300,000 prepayment from Cactus Jack for the sale of new equipment. Nike will bill Cactus Jack an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Nike recognize for a contract asset, a contract liability, and accounts receivable?
A. Contract asset: $0; contract liability: $300,000, accounts receivable, $0.
B. Contract asset: $300,000; contract liability: $0, accounts receivable, $100,000.
C. Contract asset: $300,000; contract liability: $0, accounts receivable, $0.
D. Contract asset: $0; contract liability: $300,000, accounts receivable, $100,000.
E. None of these answer choices are correct.

Answer 1

Answer:

E. None of these answer choices are correct.

Explanation:

Upon receipt of the advance payment from Cactus Jack, Nike should debit its Cash Account and credit Deferred Revenue by $300,000.  When the equipment is delivered to Jack and the additional $100,000 is received, the Deferred Revenue account is debited with $300,000 while the Sales Revenue is credited with $400,000 with additional debit to the Cash Account of $100,000.