Sanchez Co. enters into a contract to sell Product A and Product B on January 2,

Question

Sanchez Co. enters into a contract to sell Product A and Product B on January 2, 2014, for an upfront cash payment of $216,000. Product A will be delivered in 2 years (January 2, 2016) and Product B will be delivered in 5 years (January 2, 2019). Sanchez Co. allocates the $216,000 to Products A and B on a relative standalone selling price basis as follows.

Sanchez Co. uses an interest rate of 6%, which is its incremental borrowing rate. (Hint: Given the (discounted) upfront payment, accretion of the contract liability will need to be recorded.)

1. Prepare the journal entries necessary on January 2, 2014,To record upfront payment for sales of products A and B and December 31, 2014 To record interest on the contract liability (Unearned Sales Revenue)

2. Prepare the journal entries necessary on December 31, 2015. To record interest on the contract liability

3. Prepare the journal entries necessary on January 2, 2016. To record revenue on transfer of product A

Standalone selling prices Percent allocated Allocated amounts Product A 57,600 25% 54,000 Product B 172,800 75% 162,000 Total 230,400 216,000

Explanation / Answer

Solution: 1

2-1-2014 Cash Dr...........................$216000

To unearned sales revenue..........$216000

(to record upfront payment for sales of products A and B)

31-12-2014 Interest Expense (216000*0.06) $12960

To interest payable ....................$12960

(To record interest on contract liability)

Solution: 2

31-12-2015 Interest expense [(216000+12960)*.06] $137376

To interest payable.......................................$137376

(To record interest on contract liability)

Solution:3

2-1-2016 Unearned sales revenue........$54000

Interest payable [(12960+137376)*.25] $37584

To sales revenue .....................................$91584

(To record revenue on transfer of product A)

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