Question

On July 31, O’Malley Company contracted to have two products built by Taylor Manufacturing for a total of $185,000. The contract specifies that payment will only occur after both products have been transferred to O’Malley Company. O’Malley determines that the standalone prices are $100,000 for Product 1 and $85,000 for Product 2. On August 1, when Product 1 has been transferred, what is the journal entry to record this event?

Answer 1

The journal entry required to record the transfer of Product 1 on August 1 would be a debit to Product 1 Inventory and a credit to Accounts Payable for $100,000 each.

Step-by-step explanation:

The journal entry required to record the transfer of Product 1 on August 1 would be:

Debit: Product 1 Inventory $100,000

Credit: Accounts Payable $100,000

This journal entry recognizes the increase in Product 1 inventory and the corresponding increase in the liability owed to Taylor Manufacturing.

Both the debit and credit are equal to the standalone price of Product 1, which ensures that the accounting equation stays in balance.

Answer 2

Debit to contract assets for $100,000

Step-by-step explanation:

Data given in the question

Total manufacturing cost = $185,000

Standalone price for product 1 = $100,000

Standalone price for product 1 = $85,000

By considering the above information, since the product 1 has been transferred which means we debited the contract assets for $100,000 as it increased the asset account