Buffalo Windows manufactures and sells custom storm windows for three-season por
ID: 2336049 • Letter: B
Question
Buffalo Windows manufactures and sells custom storm windows for three-season porches. Buffalo also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Buffalo enters into the following contract on July 1, 2017, with a local homeowner. The customer purchases windows for a price of $ 2,470 and chooses Buffalo to do the installation. Buffalo charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of $ 580. The customer pays Buffalo $ 1,940 (which equals the standalone selling price of the windows, which have a cost of $ 1,050) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2017, Buffalo completes installation on October 15, 2017, and the customer pays the balance due.
(a) Buffalo estimates the standalone selling price of the installation based on an estimated cost of $ 450 plus a margin of 30% on cost. Prepare the journal entries for Buffalo in 2017.
(b) Given uncertainty of finding skilled labor, Buffalo is unable to develop a reliable estimate for the standalone selling price of the installation. Prepare the journal entries for Buffalo in 2017.
Explanation / Answer
Solution:-
(a) Buffalo estimates the standalone selling price of the installation based on an estimated cost of $ 450 plus a margin of 30% on cost. Prepare the journal entries for Buffalo in 2017:-
= [ 450 + 450 * 10%] + $ 1,940
= [ 450 + 45 ] + 1940
= $2,435
Fair value = $2,435
= (1,940 / 2,435 ) * 2,470
= $1,967.88
= (580 / 2,435 ) * 2,470
= $588.33
= 1,967.88 + 588.33 - 1,940
= $616.21
= (616.21 + 588.33 - 588.33)
= $616.21
(b) Given uncertainty of finding skilled labor, Buffalo is unable to develop a reliable estimate for the standalone selling price of the installation. Prepare the journal entries for Buffalo in 2017;-
So, fair value = $2,470
Standalone price of installation = fair value - standallone price of window
= 2,470 - 1,940
Standalone price of installation = $530
= (1,940 / 2,470 ) * 2,470
= $1,940
= (530 / 2,470 ) * 2,470
= $530
= 1,940 - 1,940 + 530
= $530
= 530-530+530
= $530
Date Accounts title and explanation Debit Credit July 1 ,2017 No entry september- 1-2017 Cash $1,940 Sales revenue =( Cash / fair value) * (Customer purchased window price)= (1,940 / 2,435 ) * 2,470
= $1,967.88
Unearned service revenue =( standalone selling price / fair value ) * (Customer purchased window price)= (580 / 2,435 ) * 2,470
= $588.33
Account receivable = (sales revenue + unearned service revenue ) - cash= 1,967.88 + 588.33 - 1,940
= $616.21
(To record delivery and installation expense) september- 1-2017 Cost of goods sold $ 1,050 Inventory $ 1,050 ( To record cost of goods sold) october - 15-2017 Cash $616.21 Unearned service revenue $588.33 servi9ce revenue $588.33 Accounts receivable =( Cash + unearned service revenue - service revenue)= (616.21 + 588.33 - 588.33)
= $616.21
(To record the cash collected and service revenue)Related Questions
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