Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,550,000. The project began in 2016 and was completed in 2017. Data relating to the contract are summarized below:

Assume Nortel Networks contracted to provide a customer with Internet infrastructure for $2,550,000. The project began in 2016 and was completed in 2017. Data relating to the contract are summarized below:

		2016			2017
Costs incurred during the year	$	344,000		$	1,960,000
Estimated costs to complete as of 12/31		1,376,000			0
Billings during the year		456,000			1,730,000
Cash collections during the year		272,000			1,805,000

Required:

1.	Compute the amount of revenue and gross profit or loss to be recognized in 2016 and 2017 assuming Nortel recognizes revenue over time according to percentage of completion.

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2016 assuming Nortel recognizes revenue over time according to percentage of completion.
 

Prepare a partial balance sheet to show how the information related to this contract would be presented at the end of 2016 assuming this project does not qualify for revenue recognition over time.

 

Explanation

1.

	2016			2017
Contract price	$	2,550,000		$	2,550,000
Actual costs to date		344,000			2,304,000
Estimated costs to complete		1,376,000			- 0 -
Total estimated costs		1,720,000			2,304,000
Gross profit (estimated in 2016)	$	830,000		$	246,000

Revenue recognition:

2016:	$344,000	= 20% × $2,550,000 = $510,000
	$1,720,000

2017: $2,550,000 – 510,000 = $2,040,000

Gross profit recognition:

2016: $510,000 – 344,000 = $166,000

2017: $2,040,000 – 1,960,000 = $80,000

Note: We also can calculate gross profit directly using the percentage of completion:

2016:	$344,000	= 20% × $830,000 = $166,000
	$1,720,000

2017: $246,000 – 166,000 = $80,000

2.

2016: $0 (contract not yet completed)

2017: $ 2,550,000 – 2,304,000 = $246,000

3.

$510,000 = Costs ($344,000) + profit ($166,000)

4.

Billings ($456,000) in excess of costs ($344,000)

Thank you!

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,900 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $190 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $1,900 per day and any bonus due are paid in one lump payment shortly after the end of each month.

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,900 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $190 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $1,900 per day and any bonus due are paid in one lump payment shortly after the end of each month.

•   
On July 1, based on prior experience, Rocky estimated that there is a 40% chance that it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15.
•   
On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 90% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31.
•   
On August 5 Rocky learned that it did not receive an average evaluation of “excellent” for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours.

Rocky bases estimates of variable consideration on the most likely amount it expects to receive.

Required:
1. to 3.   
Prepare the journal entries to record the transactions above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation

1.

During the July 1–July 15 period, Rocky estimates a less than 50% chance it will earn the bonus, so using the "most likely amount" approach, it assumes no bonus, and estimates its revenue as $1,900 per day × 10 days = $19,000.

2.

During the July 16–July 31 period, Rocky earns guide revenue of another 15 days × $1,900 per day = $28,500. In addition, because Rocky estimates a greater than 50% chance it will earn the bonus, using the “most likely amount” approach, it estimates a bonus receivable of $190 per day × (10 days + 15 days) = $4,750.

3.

On August 5, Rocky learns that it won’t receive a bonus, and receives only the $47,500 balance in accounts receivable. Rocky must reduce its bonus receivable to zero and record the offsetting adjustment in revenue.


Thank you!