Question Continuation
Prepare the following journal entries for Revis:
1. The journal entry on January 31 to record the first month of revenue under the contract.
2. Assuming total cost savings exceed target, the journal entry on June 30 to record receipt of the bonus.
3. Assuming total cost savings fall short of target, the journal entry on June 30 to record payment of the penalty.
Answer:
1. The journal entry on January 31 to record the first month of revenue under the contract.
Possible Price -------------------------------Possibility------------Expected Amount
$130,000 ($20,000*6+$10,000) ------80% ------- --------------$104,000 (80% * $130,000)
$110,000 ($20,000*6-$10,000) --------20% -----------------------$22,000 (20% * $110,000)
Expected value--------------------------------------------------------------$126,000 ($104,000 + $22,000)
Accounts ------------------------Debit------------Credit
Cash -------------------------------$20,000 (Debit)
Bonus receivable----------------$1,000 (Debit)
Service revenue --------------------------------- $21,000 ($126,000/6)(Credit)
2. If total cost savings exceed target, record the entry on June 30 for receipt of the bonus
Accounts --------------Debit--------------------------Credit
Cash --------------------- $10,000 (Debit)
Bonus receivable-------------------------------------$6,000 (Credit) ($1000 * 6)
Service revenue ------------------------------------- $4,000 (Credit)
3. If total cost savings fall short of target and record the entry on June 30 for payment of the penalty.
Accounts --------------Debit--------------------------Credit
Service Revenue ---------------- $16,000 (Debit)
Bonus receivable-------------------------------------$6,000 (Credit) ($126,000 / 6)
Cash ------------------------------------- $4,000 (Credit)
