Final answer:
On January 1, 2021, Pro-Sport pays True-Tech $300,000 which is recorded as unearned revenue. Monthly revenue is $50,000, and the potential bonus, with a 75% likelihood, is recognized proportionally as receivable and revenue.
Step-by-step explanation:
The student's question pertains to revenue recognition and accounting for a potential bonus receivable under a service contract. On January 1, 2021, Pro-Sport pays True-Tech an up-front fixed fee of $300,000 for six months of featured access. Additionally, there is a bonus clause that could add $180,000 to the transaction price if a certain usage threshold is met.
Booking the Cash Receipt Entry
Debit: Cash $300,000
Credit: Unearned Revenue $300,000
This entry reflects the receipt of cash which is initially recorded as unearned revenue because the service has not yet been provided.
Monthly Revenue Recognition
The monthly revenue earned is the total contract amount divided by the coverage period. Given that the contract covers a six-month period, this amounts to $300,000 / 6 = $50,000 per month.
Debit: Unearned Revenue $50,000
Credit: Revenue $50,000
This entry would be made monthly to recognize the revenue earned for each month of service provided.
Bonus Receivable Entry
Given that there is a 75% chance of True-Tech achieving the usage target, the bonus of $180,000 can be recorded as a bonus receivable proportionate to its likelihood:
Debit: Bonus Receivable $135,000 (75% of $180,000)
Credit: Revenue $135,000
Recognition of the bonus receivable would be contingent on the passage of time and achievement of the usage criteria.