Question

Riverbed Company sells goods that cost $320,000 to Ricard Company for $407,000 on January 2, 2020. The sales price includes an installation fee, which has a standalone selling price of $38,500. The standalone selling price of the goods is $368,500. 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 O for the amounts.)
b. Shaw prepares an income statement for the first quarter of 2020, ending on March 31, 2020 (installation was completed on June 18, 2020). How much revenue should Shaw recognize related to its sale to Ricard?

Answer 1

On January 2, 2020, the sale of goods and the separate installation fee should be recognized as separate performance obligations with a corresponding journal entry. Up to March 31, 2020, Riverbed Company would recognize $387,750 in revenue, including both the revenue from goods and a portion of the installation service.

Step-by-step explanation:

For part a, when Riverbed Company sells goods to Ricard Company, two separate performance obligations need to be recognized: the goods and the installation service. The journal entry on January 2, 2020, would reflect the allocation of the transaction price to these obligations based on their standalone selling prices:

Accounts Receivable $407,000

Revenue from Goods $368,500

Deferred Revenue from Installation Services $38,500

Upon recording the sale, $368,500 is recognized as revenue because the goods' delivery is the performance obligation satisfied at the time of sale. The remaining $38,500 is recorded as deferred revenue and will be recognized over the 6 months as the installation service is performed.

For part b, since the installation is completed on June 18, 2020, and the income statement is being prepared for the quarter ending on March 31, 2020, Riverbed Company should recognize the portion of the installation revenue that corresponds to the work performed up to that date. Assuming a straight-line revenue recognition for the installation fee over 6 months, by the end of the first quarter (3/6 of the term), the revenue recognized would be:

(3/6) * $38,500 = $19,250

The total revenue recognized on the income statement for the first quarter would therefore include both the revenue from the sale of goods and the proportional part of the installation services rendered up to that date, that is:

$368,500 (goods) + $19,250 (installation up to March 31, 2020) = $387,750

Answer 2

a) Journal entries to record the sale on January 2, 2020:

Debit Accounts Receivable with $407,000

Credit Sales Account with $368,500

Credit Deferred Revenue (Installation Fee) with $38,500

Being sales of goods and installation services.

b) Income Statement for 1st Quarter of 2020

Sales - $368,500

Installation Fee - $19,250

Total Income - $387,750

less cost of sales - $320,000

Net Income - $67,750

c) The revenue Shaw should recognize in relation to the sale to Ricard is $387,750 (goods and accrued installation fee). The installation fee to be recognized is for 3 months only.

Step-by-step explanation:

The installation fee is for 6 months. Therefore, 3 months' worth of fee will be recognized in the income statement ending on March 31, 2020.