Question

On January 1, 2017, Fulton Inc. enters into a contract with Gibson to deliver goods. Gibson pays $100,000 at the time the contract is signed, at which time the goods are transferred and Fulton’s performance obligation is complete. In addition, Gibson agrees to pay Fulton $100,000 on December 31, 2017, and December 31, 2018. If Fulton entered into a financing arrangement with Gibson it would charge an interest rate of 9%.

Required:

1. Determine the transaction price for the contract with Gibson.

Transaction price $ _______

2. Prepare the journal entries to record Fulton’s sales revenue on January 1 and interest revenue on December 31.

Answer 1

Hey there

In this question we have to determine the transaction price as per revenue recognition principles and also prepare journal entries as on 1st Jan and 31st Dec.

Let me help you with the same.

Transaction price of the contract is the total present value of all future receipts.

So, transaction price in this case will be calculated as per below.

Discounting factor will be considered at the rate of 9%. (As given in the question) .

Below table shows the formula as to how we have calculated discounted rates.

Now let us record the Journal entry for the same.

I hope the solution is clear to you now....Do let me know in case of any issues...

All the best !!

Happy Studying :)