Question

Shaw Company sells goods that cost $300,000 to Ricard Company for $410,000 on January 2, 2020. The sales price includes an installation fee, which has a standalone selling price of $40,000. The standalone selling price of the goods is $370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete. (a) Prepare the journal entries (if any) to record the sale on January 2, 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Answer 1

The journal entries for the cost of sales

Dr Cost of sales $300,000

Cr Inventory $300,000

The journal entries for the sales transaction

Dr Accounts receivable $410,000

Cr Sales $370,000

Cr Unearned revenue $40,000

Step-by-step explanation:

The total sales price of the transaction was no doubt $410,000, however the bone of contention is whether Shaw company can recognize the entire amount as sales on the date making the sales transaction. The answer is emphatic no as amount of sales amount recognizable is a function of performance obligations already discharged.

The transfer of the goods to Ricard company on January 2nd ,2020 entitles Shaw company to record as sales the standalone price of the goods but not the installation price as installation price would be recognized on a monthly basis as installation progresses, in other words as at 2nd January, 2020 no installation has been carried out, hence the it is not shown in sales yet.