a. Prepare the journal entry to record any revenue to be recognized during the current period. Show all supporting computations
Computer Science & ITGeneralWorked Solution
Gundy Communications Systems signed a contract to develop and install an integrated network for Dwight Auto Dealerships, Inc. in five phases. Each phase is considered a performance obligation. The transaction price, including installation, is $ 2,600,000. Each phase is fully functional at the point of delivery. The five phases of the total network products each have standalone values as follows:
Network Phase Standalone Sales Value
Phase 1 ……………………… $ 300,000
Phase 2 ……………………… 760,000
Phase 3 ……………………… 560,000
Phase 4 ……………………… 440,000
Phase 5 ……………………… 940,000
Total $ 3,000,000
The contract price is collected in advance and Phases 1 and 2 are completed during the current year. Gundy expects Phase 3 and 4 to be completed in the next 12 months and Phase 5 in the following year. Ignore implications of any financing component.
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a. Prepare the journal entry to record any revenue to be recognized during the current period. Show all supporting computations.
b. Prepare disclosures related to any remaining performance obligations at the end of the current year.
SOLUTION
a.
Description
Standalone Sales Value
Relative Fair Value
Contract Price
Revenue Recognized
Phase 1*
$300,000
10.00%
$2,600,000
$260,000
Phase 2*
760,000
25.33%
$2,600,000
658,580
Phase 3
560,000
18.67%
$2,600,000
485,420
Phase 4
440,000
14.67%
$2,600,000
381,420
Phase 5
940,000
31.33%
$2,600,000
814,580
Total
$3,000,000
100.00%
$2,600,000
*Delivered element
ACCOUNT
Date of Delivery
Date of Delivery
Cash
2,600,000
Software Revenue ($260,000 + $658,580)
918,580
Unearned Software Revenue
1,681,420
The unearned software revenue is deferred until the other contract components are delivered and are fully functional.
b. Disclosure related to remaining performance obligation.
As of December 31, the aggregate amount of the transaction price allocated to the remaining performance obligations is $1,681,420. Gundy expects to recognize this revenue as development and installation of the network system is completed, which is expected to occur over the next 12–24 months.