Question
Problem 5-8 Variable transaction price [LO5-3, 5-6) 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 morths. Burger Boy pays Velocity a fixed fee of $60,000 each month after it has received that month's services (e g. Burger Boy pays Velocity on February 1 for the services provided in January). At the end of the contract Velocity either will give Burger Boy a refund of $20,000 or will be entitled to an additional $20000 bonus, depending on whether sales at Burger Boy at yearend have increased to a target level. At the inception of the contract. Velocity estimates an 80% chance that it will earn the $20,000 After four months, crumstances 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 $20.000 bonus and calculates the contract price based on the expected value of future payments to be received. Required: 1. to 4. Prepare the journal entries related to the contract (If no entry is required for a transaction/event, select "No journal entry required" in the first account field) Journal entry worksheet Prey3f6 Next
Explanation / Answer
NO General Journal Debit Credit 1 Accounts Receivable 60000 Bonus Receivable 1500 Service Revenue 61500 ([$60,000×8] + $20,000)= $500,000 80% 400000 ([$60,000×8] – $20,000)=$460,000 20% 92000 Expected value at contract inception: 492000 492000/8 61500
