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 $20,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $10,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $10,000 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.

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.

Explanation / Answer

Solution:

(A).

Cash 20,000

Accounts Receivables 20,000

(B).

Bonus Expences 10,000

Accrue Bonus Liabilities 10,000

(C).

Penalty 8,000

   Cash 8,000

(D).

Cash 10,000

Tax 10,000

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