Question

On January 1, 2017, Sage Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for $2,800. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Sage identifies two performance obligations and allocates $1,120 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is $670; the shelves have a cost of $330.

Prepare the journal entry on January 1, 2017, for Waterway Prepare the journal entry on February 5, 2017, for Waterway when the wiring base is delivered to the customer. Prepare the journal entry on February 25, 2017, for Waterway when the shelving unit is delivered to the customer and Waterway receives full payment.

Answer 1

On January 1, 2017, there is no journal entry since the delivery has not occurred. On February 5, 2017, the journal entry records the cost of the wiring base that was delivered. On February 25, 2017, the journal entry recognizes the revenue, records cost for the shelving unit, and reflects the receipt of cash payment in full.

Step-by-step explanation:

The student's question relates to accounting journal entries for specific dates concerning a contract Sage Co. has with a customer involving the delivery of a wiring base and a shelving unit. On January 1, 2017, Sage Co. enters into the contract but there is no delivery yet, so no journal entry is recorded. On February 5, 2017, when the wiring base is delivered, Sage Co. would recognize the cost of goods sold (COGS) but defer revenue since payment is contingent upon delivery of the shelving unit. The journal entry would be:

• Debit Inventory $670 (to record the COGS)
• Credit Cost of Goods Sold $670 (reducing inventory for the base delivered)

The revenue and related receivable would be recognized only after the shelving unit is delivered.

On February 25, 2017, when the shelving unit is delivered and payment is received, Sage Co. would make the following journal entries:

• Debit Accounts Receivable $2,800 (to record the receivable upon completion of the performance obligations)
• Credit Revenue $2,800 (to recognize revenue upon completion of the performance obligations)
• Debit Cost of Goods Sold $330 (to record the COGS for the shelving unit)
• Credit Inventory $330 (reducing inventory for the shelving unit delivered)
• Debit Cash $2,800 (to record payment received)
• Credit Accounts Receivable $2,800 (to settle the receivable)

Answer 2

January 1, 2017

Debit: Accounts Receivable $2800

Credit: Deferred Revenue[Wiring Base] - $1120

Credit: Deferred Revenue[Shelving Unit] - $1680

Narration: Contract Detail and invoicing of the client.

February 5, 2017

Debit Deferred Revenue[Wiring Base] - $1120

Credit Revenue Account - [Wiring Base] - $1120

Narration: Revenue recognition of Wiring Base delivered to customer

February 25, 2017

Debit Deferred Revenue[Shelving Unit]- $1680

Credit Revenue Account - [Shelving Unit] - $1680

Narration: Revenue recognition of Shelf delivered to customer

February 25, 2017

Debit: Bank - $2800

Credit: Accounts Receivable - $2800

Narration: Payment received in settlement of contract fully delivered

Step-by-step explanation:

The question is an example of a Performance Contract.

A Performance Contract is an agreement with a customer by a vendor to discharge a service or provide goods that are distinct from each other. The accounting for this obligations will therefore be recorded and recognized separately.

It is also important to note that the services or goods must be separately identifiable and the customer must be able to derive from each goods on individually or jointly.

The rule is to

1. Recognize the contract and invoice amount with the customer as Deferred Income.
2. Identify the distinct obligations and services to be provided.
3. Identify the transaction amount for each service or good.
4. As each obligation is met, the revenue is finally recognized and transferred from Deferred income.