2.50 points Rocky Guide Service provides guided 1-5 day hiking tours throughout
ID: 2542938 • Letter: 2
Question
2.50 points Rocky Guide Service provides guided 1-5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $2,600 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $260 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $2,600 per day and any bonus due are paid in one lump payment shortly after the end of each month. On July 1, based on prior experience, Rocky estimated that there is a 20% chance that it will earn the bonus for July tours. It guided a total of 10 days from July 1-July 15 On July 16, based on Rocky's view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 70% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16-July 31 On August 5 Rocky learned that it did not receive an average evaluation of "excellent" for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours. Rocky bases estimates of variable consideration on the expected value it expects to receive Required 1. to 3 Prepare the journal entries to record the transactions above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) No Date 39.000 73August 05 Cash 65.000 /4 August 05 Service revenueExplanation / Answer
No Date General Journal Debit Credit 1 Jul-15 Accounts Receivable $ 26,000 Service Revenue $ 26,000 2 Jul-31 Accounts Receivable $ 39,000 Bonus Receivale $ 6,500 Service Revenue $ 45,500 3 Aug-05 Cash $ 65,000 Accounts Receivable $ 65,000 4 Aug-05 Service Revenue $ 6,500 Bonus Receivale $ 6,500 Working Notes : 1 During Jul - 01 to Jul - 15 Period, Rocky estimates a less than 50 % chance it will earn the bonus so, using the most likely amount approach, It assumes no bonus and estimates its revenue as $ 2,600 X 10 days = $ 26,000. 2 During Jul - 16 to Jul - 31 Period Rocky earns Guide revenue of another 15 days X $2,600 per day = $ 39,000. In addition because Rocky estimates a greaten than 50% chance it will earn the bonus, using the "most likely amount approach" it estimates a bonus receivable of $ 260 per day X ( 10 days + 15 days ) = $ 6,500. 3 On August 05, Rocky learnt that it wont receive a bonus, and receives only the $ 65,000 balance in accounts receivable. Rocky must reduce it's Bonus receivable to Zero and record the offsetting adjustment in revenue.
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