Question

Respond to the requirements related to the following independent revenue arrangements for Red Hot Firepit Company products and services.

Red Hot offers contract FP100 which is comprised of a free-standing outdoor firepit plus installation to a homeowner's gas line for a total price of $700. On a standalone basis, the firepit sells for $600 (cost $400 ), and Red Hot estimates that the fair value of the installation service (based on cost-plus estimation) is $200. Red Hot signed 25 FP100 contracts on September 30,2023 , and customers paid the contract price in cash. The firepits were delivered and installed on October 15, 2023. Prepare journal entries for Red Hot for 25 FP100 contracts in September AND October 2023. Journal entry descriptions are not required. YOU MUST SHOW THE DETAIL OF ALL CALCULATIONS.

Answer 1

To prepare the journal entries for the Red Hot FP100 contracts, calculate the revenue and costs for each contract. Then, prepare the journal entries for each contract on September 30, 2023, and October 15, 2023.

Step-by-step explanation:

To prepare the journal entries for Red Hot for the FP100 contracts, we need to consider the revenue recognition criteria. According to the criteria, revenue should be recognized when it is realized or realizable, and earned. In this case, the revenue is earned when the firepits are delivered and installed. Let's calculate the revenue and costs for each contract:

• Revenue = Contract price = $700
• Cost of firepit = $400
• Estimated fair value of installation service = $200
• Profit on each contract = Revenue - Cost of firepit - Estimated fair value of installation service = $700 - $400 - $200 = $100

Now, let's prepare the journal entries for each contract:

1. September 30, 2023: Debit Accounts Receivable ($700), Credit Revenue ($700), Debit Cost of Goods Sold ($400), Debit Estimated Cost of Installation ($200), Credit Inventory ($400), Credit Estimated Fair Value of Installation ($200), Credit Profit on Contracts ($100)
2. October 15, 2023: Debit Inventory ($400), Debit Estimated Cost of Installation ($200), Credit Accounts Receivable ($700), Credit Revenue ($700), Credit Cost of Goods Sold ($400), Credit Estimated Fair Value of Installation ($200), Credit Profit on Contracts ($100)