Question

Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2021, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $80,000. The contract specifies that Super Rise will receive an additional $40,000 at the end of the 10 months if there is no unexpected delay, stoppage, or accident during the year. Super Rise estimates variable consideration to be the most likely amount it will receive.

Required:
1. Assume that, because the building sees a constant flux of people throughout the day, Super Rise is allowed to access the elevators and related mechanical equipment only between 3am and 5am on any given day, which is insufficient to perform some of the more time-consuming repair work. As a result, Super Rise believes that unexpected delays are likely and that it will not earn the bonus. Prepare the journal entry Super Rise would record on January 1.
2. Assume instead that Super Rise knows at the inception of the contract that it will be given unlimited access to the elevators and related equipment each day, with the right to schedule repair sessions any time. When given these terms and conditions, Super Rise has never had any delays or accidents in the past. Prepare the journal entry Super Rise would record on January 31 to record one month of revenue.
3. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it does not need to spend more than two hours on any given day to operate the elevator safely because the client's elevator is relatively new. Therefore, Super Rise believes that unexpected delays are very unlikely. Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable.

Answer 1

1) Jan 1

Dr Cash $80,000

Cr Deferred Revenue $80,000

2)Jan 31

Dr Deferred Revenue 8,000

Dr Bonus Receivable 4,000

Cr Service Revenue 12,000

3)May 31

Dr Deferred Revenue 8,000

Dr Bonus Receivable 20,000

Cr Service Revenue 28,000

Step-by-step explanation:

1. Preparation of the journal entry that Super Rise would record on January 1.

Based on the information we were told that a contract was obtained to maintain an elevator for 10 months in which they receives a fixed payment of the amount of $80,000 which means that the Journal entry on January 1will be:

Jan 1

Dr Cash $80,000

Cr Deferred Revenue $80,000

2)Preparation of journal entry Super Rise would record on Jan 31

Jan 31

Dr Deferred Revenue 8,000

(80,000/10months)

Dr Bonus Receivable 4,000

(40,000/10months)

Cr Service Revenue 12,000

3)Preparation of the journal entry Super Rise would record on May 31

May 31

Dr Deferred Revenue 8,000

(80,000/10months)

Dr Bonus Receivable 20,000

[( 40,000/10months)*5months]

January to May will give us 5months

Cr Service Revenue 28,000