On January 1 Revis Consulting entered into a contract to complete a cost reducti

Question

On January 1 Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $68,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $34,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $34,000 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received. Required: Prepare the following journal entries for Revis:

1. to 3. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue, assuming total cost savings exceed target, record the entry on June 30 for receipt of the bonus and assuming total cost savings fall short of target and record the entry on June 30 for payment of the penalty. (If no entry is required for a particular transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Date Account Head Debit Credit Jan-31 Cash 68,000.00 Consulting Revenue 68,000.00 Jan-31 Bonus Receivable     3,400.00 Consulting Revenue     3,400.00 To record expected value of bonus receivable for the month of Jan. Jun-30 Cash 34000 Bonus Receivable 20,400.00 Consulting Revenue 13,600.00 To record the receipt of 20,400 ( expected value of bonus receivable) and 13600(remaining portion of unrecognized portion) cost savings fall short of target Jun-30 Consulting Revenue 20,400.00 Bonus Receivable 20,400.00 Penalty 34000                  -   Cash 34000 To record the payment of penalty and the reversal of revenue already recognized.

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