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 $54,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $18,000 or will be entitled to an additional $18,000 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 $18,000 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 $18,000. Required: 1. Prepare the journal entry to record revenue at the end of each month for the first four months of the contract 2. Prepare the journal entry that the Velocity Company would record at the start of the fifth month to recognize the change in estimate associated with the reduced likelihood that the $18,000 bonus will be received. 3. Prepare the journal entry to record the revenue at the end of each month for the second four months of the contract. 4. Prepare the journal entry after eight months to record receipt of the $18,000 cash bonus. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Answer is complete but not entirely correct. No 1 Transaction 1 Cash Bonus receivable Service revenue 2 2 Service revenue Bonus receivable General Journal Debit Credit 54,000 1,350 55,350 3,600 3,600 3 3 Cash 54,000 Bonus receivable 450 Service revenue 54,450 4 4 Cash 70,000 Bonus receivable 18,000 Service revenue 52,000
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 $54,000 at the end of each month. At the end of the contract, Velocity either will give Burger Boy a refund of $18,000 or will be entitled to an additional $18,000 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 $18,000 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 $18,000. Required: 1. Prepare the journal entry to record revenue at the end of each month for the first four months of the contract 2. Prepare the journal entry that the Velocity Company would record at the start of the fifth month to recognize the change in estimate associated with the reduced likelihood that the $18,000 bonus will be received. 3. Prepare the journal entry to record the revenue at the end of each month for the second four months of the contract. 4. Prepare the journal entry after eight months to record receipt of the $18,000 cash bonus. Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Answer is complete but not entirely correct. No 1 Transaction 1 Cash Bonus receivable Service revenue 2 2 Service revenue Bonus receivable General Journal Debit Credit 54,000 1,350 55,350 3,600 3,600 3 3 Cash 54,000 Bonus receivable 450 Service revenue 54,450 4 4 Cash 70,000 Bonus receivable 18,000 Service revenue 52,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text: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 $54,000 at the end of each month. At the end of the
contract, Velocity either will give Burger Boy a refund of $18,000 or will be entitled to an additional $18,000 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 $18,000 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 $18,000.
Required:
1. Prepare the journal entry to record revenue at the end of each month for the first four months of the contract
2. Prepare the journal entry that the Velocity Company would record at the start of the fifth month to recognize the change in
estimate associated with the reduced likelihood that the $18,000 bonus will be received.
3. Prepare the journal entry to record the revenue at the end of each month for the second four months of the contract.
4. Prepare the journal entry after eight months to record receipt of the $18,000 cash bonus.
Note: If no entry is required for a transaction/event, select "No journal entry required" in the first account field.
Answer is complete but not entirely correct.
No
1
Transaction
1
Cash
Bonus receivable
Service revenue
2
2
Service revenue
Bonus receivable
General Journal
Debit
Credit
54,000
1,350
55,350
3,600
3,600
3
3
Cash
54,000
Bonus receivable
450
Service revenue
54,450
4
4
Cash
70,000 ×
Bonus receivable
Service revenue
18,000 ×
52,000
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Step 1: Define the term Contract price:
VIEWStep 2: 1. Prepare the journal entry to record the revenue as follows:
VIEWStep 3: 2. Pass the journal entry to record the expected bonus receivable as follows:
VIEWStep 4: 3. Prepare the journal entry to record the revenue recognized as follows:
VIEWStep 5: 4. Pass the journal entry to record the receipt as follows:
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