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 $66,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $22,000 or will be entitled to an additional $22,000 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 $22,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, 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 $22,000. Required: 1. to 4. 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.) View transaction list Journal entry worksheet 1 2 4 Record the entry at the start of fifth month, to recognize the change in estimate associated with the reduced likelihood that the $22,000 bonus will be received.
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 $66,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $22,000 or will be entitled to an additional $22,000 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 $22,000 bonus and calculates the contract price based on the expected value of future payments to be received. At the start of the fifth month, 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 $22,000. Required: 1. to 4. 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.) View transaction list Journal entry worksheet 1 2 4 Record the entry at the start of fifth month, to recognize the change in estimate associated with the reduced likelihood that the $22,000 bonus will be received.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:## Contract Analysis and Journal Entry Preparation
Velocity, a consulting firm, collaborates with Burger Boy, a fast-food restaurant, to design a marketing strategy aimed at competing with Burger King. The contract duration is eight months, with Burger Boy agreeing to pay $66,000 monthly. Depending on year-end sales results at Burger Boy, there are two financial outcomes for Velocity:
1. A refund of $22,000 to Burger Boy if sales targets are not met.
2. An additional bonus of $22,000 if sales reach the target.
At the contract's initiation, Velocity had calculated an 80% probability of achieving the $22,000 bonus. This probability impacted the contract pricing through expected future payments. However, at the start of the fifth month, the probability estimate was revised to 60%.
### Required Actions:
1. **Prepare Journal Entries:** Document the financial transactions associated with the contract. If no entry is required for a specific transaction/event, select the option indicating "No journal entry required."
### Journal Entry Worksheet
The worksheet provides instructions for recording changes in financial estimations:
- **Task:** Record the journal entry at the beginning of the fifth month to account for the decreased likelihood of receiving the $22,000 bonus due to revised probability estimates.
The worksheet aids in maintaining accurate financial records reflecting changes in expected outcomes, ensuring compliance with accounting standards.
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