SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 6.1

What is being given up? What is being received?

a. This transaction involves a sale of goods Monetary asset – cash is being received
that are tangible assets. Control transfers to upon delivery.
the buyer upon delivery, coincident with the
transfer of possession and passing of legal
title.

b. This transaction involves a sale of goods Monetary asset – a short-term, interest-

that are tangible assets. Control transfers to bearing receivable is created upon
the buyer upon delivery, coincident with the delivery.
transfer of possession and passing of legal
title.

c. This transaction involves a sale of services Consideration in the form of accounting

for which the concepts of possession and services. This transaction has commercial
passing of legal title do not apply. substance since the services are different.

d. This transaction involves both goods and Monetary asset – a short-term receivable
services (also known as multiple is created upon delivery.
deliverables) that are sold together for one
fee.

BRIEF EXERCISE 6.2

A contract is created when a company sells something.

a. The contract created in this transaction is likely evidenced by the sales order or invoice.
With terms FOB shipping point, the seller (the manufacturer) is obligated until the goods
are shipped; legal title generally passes to the buyer at this point. The buyer obtains the
risks and rewards of ownership at the point of shipment. Any loss or damage incurred
during shipping would be borne by the buyer.

b. The contract created in this transaction is likely evidenced by the sales order or invoice.
With terms FOB destination point, the seller (the manufacturer) is obligated until the goods
have been received by the buyer; legal title generally passes to the buyer at this point. Any
loss or damage incurred during shipping would be borne by the seller.

c. FOB terms would suggest that legal title passes at point of shipment. However, the seller
(the manufacturer) has an additional implicit or constructive obligation in this contract. The
seller’s past practice of replacing lost or damaged products means that the seller is
obligated until the goods are received by the buyer, irrespective of the passing of legal title.

BRIEF EXERCISE 6.6

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No entry is required on May 10, 2023, because neither party has performed on the contract. That is,
neither party has an unconditional right as of May 10, 2023. On June 15, 2023, Cosmo delivers the
product and therefore should recognize revenue as it received an unconditional right to
consideration on that date. In addition, Cosmo satisfies its performance obligation by delivering the
product to Greig.

The journal entry to record the sale and related cost of goods sold is as follows.
June 15, 2023

Accounts Receivable ...................................................................... 2,000

Sales Revenue ...................................................................... 2,000
To record sales

Cost of Goods Sold ......................................................................... 1,300

Inventory................................................................................ 1,300
To record cost of goods sold

Upon receiving the cash payment on July 15, 2023, Cosmo makes the following entry.
July 15, 2023

Cash .....................................................................................2,000
Accounts Receivable............................................................ 2,000

BRIEF EXERCISE 6.8

Talarczyk makes the following entry to record the sales of products with warranties.
July 1, 2023

Cash 1,012,000
Warranty Expense 40,000
Warranty Liability 40,000
Unearned Revenue 12,000
Sales Revenue 1,000,000
To record cash sale

Cost of Goods Sold 550,000

Inventory 550,000
To record cost of goods sold
Talarczyk reduces the Warranty Liability account over the first two years as the actual warranty costs are
incurred. The company also recognizes revenue related to the service-type warranty over the two-year period
that extends beyond the assurance warranty period (two years). The warranty revenue is recognized over
time since the customer is receiving the benefit over time (i.e., insurance-type protection). In most cases, the
unearned revenue is recognized on a straight-line basis and the costs associated with the service-type
warranty are expensed as incurred.

BRIEF EXERCISE 6.10 Calculate as an ordinary annuity:

Using a financial calculator:

PV ? Yields $84,502.55
I 12%
N 2

2
 PMT $(50,000)
FV 0
Type 0

BRIEF EXERCISE 6.11

The transaction price should include management’s estimate of the amount of

consideration to which the entity will be entitled. Given the multiple outcomes and
probabilities available based on prior experience, the probability-weighted method is the
most predictive approach for estimating the variable consideration in this situation:

Completion Date Probability Expected Value

August 1 70% chance of $1,150,000 = $ 805,000
August 8 20% chance of $1,100,000 = 220,000
August 15 5% chance of $1,050,000 = 52,500
After August 15 5% chance of $1,000,000 = 50,000
$1,127,500
Thus, the total transaction price is $1,127,500 based on the probability-weighted estimate.
BRIEF EXERCISE 6.12

a. In this situation, Nair uses the most likely amount as the estimate - $1,150,000 since there are
only two possible outcomes.
b. When there is limited information with which to develop a reliable estimate of completion,
then no revenue related to the $150,000 incentive should be recognized until the uncertainty
is resolved. Therefore, no revenue from the incentive is recognized until the completion of
the contract.

BRIEF EXERCISE 6.13 a.

January 2, 2023
Notes Receivable ............................................................................. 10,000
Sales Revenue ...................................................................... 10,000
To record sales

Cost of Goods Sold ........................................................................ 6,000

Inventory ............................................................................... 6,000
To record cost of goods sold

b.
Revenue Recognized in 2023
Sales revenue .................................................................................. $ 10,000
Interest income ($11,000 – $10,000)............................................... 1,000
Total revenue ........................................................................ $ 11,000

Find out the interest rate charged?

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 FV 11,000
PV 10,000
PMT 0
I/Y ? 10%
N 1

BRIEF EXERCISE 6.14

Parnevik should record revenue of $660,000 on March 1, 2023, which is the fair value of the inventory
in this case. Parnevik is also financing this purchase and records interest income on the note over
the 5-year period. In this case, the interest rate is imputed to be 10%.
Find out the interest rate charged?
FV 1,062,937
PV 660,000
PMT 0
I/Y ? 10%
N 5

b. The journal entries to record Parnevik’s sale to Goosen Company and related cost of goods
sold are as follows.
March 1, 2023
Notes Receivable .................................................................. 660,000
Sales Revenue............................................................ 660,000
To record sales

Cost of Goods Sold ....................................................... …... 400,000

Inventory ..................................................................... 400,000
To record cost of goods sold

c. Parnevik makes the following entry to record interest income for 2023.

December 31, 2023

Notes Receivable .................................................................. 55,000
Interest Income1 ......................................................... 55,000
1
(10% X $660,000 X 10/12)

BRIEF EXERCISE 6.15

a. July 10, 2023

Accounts Receivable ........................................................... 700,000
Sales Revenue .......................................................... 595,000
Refund Liability (15% X $700,000) ........................... 105,000
To record sale on account

Cost of Goods Sold ............................................................. 476,000

Estimated Inventory Returns1 ............................................. 84,000
Inventory .................................................................. 560,000
1
(15% X $560,000)
To record cost of goods sold

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b. October 10, 2023

Refund Liability .................................................................... 78,000

Accounts Payable .................................................... 78,000
To record returns from customers

Returned Inventory2 ............................................................. 62,400

Estimated Inventory Returns ................................... 62,400
2
($560,000 ÷ $700,000) X $78,000
To record return of inventory

Refund Liability…………………………… 27,000

Sales Revenue……………………… ........................... 27,000
To adjust refund liability for end of right of return
(105,000 – 78,000)
Cost of Goods Sold………………………. 21,600
Estimated Inventory Returns……. ............................ 21,600
To adjust cost of goods sold for end of right of return

27,000 x .80 = 21,600

BRIEF EXERCISE 6.16

a. July 10, 2023

Accounts Receivable ........................................................... 700,000
Sales Revenue ..................................................... 700,000
To record sale on account

Sales Returns and Allowances1 ........................................ 105,000

Allowance for Sales Returns and
Allowances ............................................................. 105,000
1
(15% X $700,000)
To accrue for sales returns

Cost of Goods Sold ............................................................. 476,000

Estimated Inventory Returns1 ............................................. 84,000
Inventory .................................................................. 560,000
1
($560,000 ÷ $700,000) X $105,000
To record cost of goods sold
b. October 10, 2023

Allowance for Sales Returns and

Allowances ..................................................................... 78,000
Accounts Payable ..................................................... 78,000
To record return from customer

Returned Inventory2 ............................................................ 62,400

Estimated Inventory Returns ................................... 62,400

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 2
($560,000 ÷ $700,000) X $78,000
To record return of inventory

Allowance for Sales Returns and

Allowances …………………………… 27,000
Sales Returns and Allowances………… .................. 27,000
To adjust allowance for sales returns and allowances
for the end of right of return

Cost of Goods Sold………………………. 21,600

Estimated Inventory Returns……. ............................ 21,600
To adjust cost of goods sold for end of right of return

BRIEF EXERCISE 6.18

a.
Accounts Receivable ...................................................................... 110,000
Sales Revenue ...................................................................... 110,000

Sales Revenue ................................................................................. 6,600

Contract Liability ($110,000 x 6%) ....................................... 6,600

Manual reduces revenue by $6,600 because it is probable that it will provide rebates amounting to
6%. This is the most likely outcome. As a result, Manual recognized revenue of $103,400.
b.
Accounts Receivable ...................................................................... 110,000
Sales Revenue ...................................................................... 110,000

Sales Returns and Allowances ...................................................... 6,600

Allowance for Sales Returns and
Allowances ($110,000 x 6%)...................................... 6,600

BRIEF EXERCISE 6.19

February 2023
Cash .............................................................................................. 10,000
Contract Liability ................................................................. 10,000
To record the sale of gift cards

Contract Liability ............................................................................. 4,444

Service Revenue1 ................................................................. 4,444
To record service revenue

The expected breakage $1,000 ($10,000 x 10%)

The redemption amount: $10,000 - $1,000 breakage or $9,000
1
[$4,000 x ($10,000/$9,000)]

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BRIEF EXERCISE 6.22

The performance obligations relate to the software sale and the consulting services. They are
distinct.
a. If interdependent, the contract is accounted for as a single revenue amount of
$33,333 = [$200,000 X 6/36].
b. If not interdependent, sales revenue of $125,000 is recognized at delivery of the software and
service revenue is recognized for 6 months. Revenue of
$137,500 = ($125,000 + [$75,000 X 6/36]) is recognized in 2023, based on estimated stand-
alone values.
BRIEF EXERCISE 6.23
Steps Analysis
Step 1: Identify the contract Both parties have agreed to enter into a contract. The
with customers. quantity, price, and payment terms have been agreed to
and each party’s rights under the contract are clear. The
contract has commercial substance. There are no
indications of any concerns regarding collectibility as the
majority of the contract amount is collected at the time of
the delivery of the windows.
Step 2: Identify the separate The contract includes two performance obligations: the
performance obligations in sale and the installation of the windows.
the contract.
Step 3: Determine the $2,400
transaction price.
Step 4: Allocate the Schedule 1 below
transaction price to the
separate performance
obligations.
Step 5: Recognize revenue The first performance, the sale of windows, is satisfied on
when each performance September 1, when the windows are delivered to the
obligation is satisfied. homeowner. The revenue related to this performance
obligation would be recognized at this point.

The second performance obligation related to the

installation of the windows is satisfied and the revenue is
recognized on October 15, when the installation is
completed.

Schedule 1
Stand-Alone
(SA) Selling % of Total SA Contract Allocation of
Performance obligation Price Selling Price Price Contract Price
Window delivery $2,000 76.92% X $2,400 $1,846
Installation 600 23.08% X $2,400 554
$2,600 100 % $2,400

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BRIEF EXERCISE 6.24
July 1, 2023
No entry – neither party has performed under the contract.

Geraths makes the following entries for delivery and installation.

September 1, 2023
Cash .................................................................................. 2,000
Unearned Revenue .............................................................. 154
Sales Revenue ..................................................................... 1,846
To record sales

Cost of Goods Sold ......................................................................... 1,100

Inventory................................................................................ 1,100
To record cost of goods sold

(Windows delivered, performance obligation for installation recorded)

October 15, 2023

Cash ........................................................................................400
Unearned Revenue .......................................................................... 154
Service Revenue - Installation ............................................. 554

The sale of the windows is recognized once delivered. The installation fee is recognized when the
windows are installed.