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For the first quarter of 2017, prepare any needed correcting or adjusting journal entries related to the following information. For corrections, first prepare an entry reversing the original incorrect entry, then prepare the correct entry. Show the calculation of any amounts not included in the problem. Round intermediate calculations to 4 significant digits (e.g., 63.27%). If no journal entry is needed, write “No Entry Needed” and explain briefly why it is not needed.
In addition to its normal operations, during the first quarter of 2017, TECHNOGYM launched a new service through its website called MagnaTrain. This web site offers online fitness training through contracted independent trainers. Each trainer sets her own price for a training session. TECHNOGYM connects interested individuals with the trainers but does not directly provide any of the training. For its services and per the contract, TECHNOGYM is entitled to 15% of the total per session fee. TECHNOGYM has recorded the entire $6,000,000 fee collected in cash from the sessions as revenue and recognized its cost associated with MagnaTrain as 85% of the collected fee.
Also, in addition to its normal operations, during the first quarter of 2017, TECHNOGYM entered into a long-term agreement to supply its internally developed smart-phone-interactive fitness equipment, BodyTracker, and maintenance support to a regional 24 hour fitness chain. TECHNOGYM was paid $9,000,000 during March, 2017 for the equipment plus 3 years of maintenance support (beginning on April 1, 2017—the first day of the next quarter). The fitness chain could have bought just the equipment for $7,500,000 with no support and they could have independently contracted for the maintenance support for $3,000,000 for the three year period. The cost of the equipment sold was $3,500,000. TECHNOGYM has recorded the $9,000,000 as a point-of-sale cash transaction.
Note: Before answering this item, read the section of chapter 13 in the textbook (9th edition) about “Loss Contingencies” on pages 730-732. During the first quarter of 2017, the company to which TECHNOGYM sold its West Coast division on Dec. 31, 2016 filed a lawsuit alleges that TECHNOGYM misrepresented the division's assets and liabilities. The plaintiff is seeking $2.4 million as an adjustment to the purchase price. TECHNOGYM’s attorneys advise that it is reasonably possible the company could lose $1 million, but that it's extremely unlikely it could lose the $2.4 million asked for.
Explanation / Answer
Date Account and Description Debit Credit Reversal Entry Training Services Fee $6,000,000 To Cash $6,000,000 (To reverse Service fee collection recorded as revenue) Cash $5,100,000 To Training Professional Cost $5,100,000 (To reverse Trainer's cost payment accounted as expense) Correcting Entry Cash $900,000 To MagnaTrain Commission Income $900,000 (To record MagnaTrain service fee commission of 15% of total collection) Reversal Entry Sale - Bodytracker $9,000,000 To Cash $9,000,000 (To reverse Sale of body tracker with AMC fully reorded as sale) Cash $6,428,571 To Sale - Bodytracker $6,428,571 Cost of Goods Sold $3,500,000 No entry is required as there is no inforamtion given abut error in recirding this COGS. Cash $2,571,429 To Unearned Revenue - Maintenance Contract $2,571,429 (To record maintenance contract sold for three years , payment receied in advance) Contingent Loss Expenses $1,000,000 To Accrual for Contingency Loss $1,000,000 (To record minimum certain contigency loss) Baaknce Contingency Loss $1,400,000 No Entry is required as this part of the loss is not certain. Working 1 MagnaTrain Total Collection $6,000,000 Technogym Share (%) 15% Technogym Share ($) $900,000 Trainer's cost $5,100,000 Working Body Tracker $7,500,000 71% Maintenance Contract $3,000,000 29% $10,500,000 100% Combined Sale $9,000,000 Split in same ratio as stand alone Body Tracker $6,428,571 71% Maintenance Contract $2,571,429 29%
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