Question

Sarasota Windows manufactures and sells custom storm windows for three-season porches. Sarasota also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Sarasota enters into the following contract on July 1, 2020, with a local homeowner. The customer purchases windows for a price of $2,440 and chooses Sarasota to do the installation. Sarasota charges the same price for the windows irrespective of whether it does the installation or not. The customer pays Sarasota $2,040 (which equals the standalone selling price of the windows, which have a cost of $1,130) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2020, Sarasota completes installation on October 15, 2020, and the customer pays the balance due.

Sarasota estimates the standalone selling price of the installation based on an estimated cost of $420 plus a margin of 30% on cost.

Prepare the journal entries for Sarasota in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round answer to 0 decimal places, e.g. 5,125.)

Date	Account Titles and Explanation	Debit	Credit
Oct. 15, 2020Jul. 1, 2020Sep. 1, 2020
	(To record contract entered into)
Jul. 1, 2020Sep. 1, 2020Oct. 15, 2020
	(To record sales)
	(To record cost of goods sold)
Jul. 1, 2020Sep. 1, 2020Oct. 15, 2020
	(To record payment received)

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List of Accounts

  

  

Given uncertainty of finding skilled labor, Sarasota is unable to develop a reliable estimate for the standalone selling price of the installation.

Prepare the journal entries for Sarasota in 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Sep. 1, 2020Oct. 15, 2020
	(To record sales)
	(To record cost of goods sold)
Oct. 15, 2020Sep. 1, 2020
	(To record payment received)

show work and explain

Answer 1

Answer:

a.

No	Date	General Journal	Debit	Credit
1	01-Jul-20	No entry
		To record contract entered into
2	01-Sep-20	Cash	2,040
		Accounts Receivable	400
		Unearned Revenue - Installation		515
		Sales Revenue		1,925
		To record sales
3	01-Sep-20	Cost of goods sold	1,130
		Inventory		1,130
		To record cost of goods sold
4	15-Oct-20	Cash	400
		Unearned Revenue - Installation	515
		Sales Revenue		515
		Accounts Receivable		400
		To record payment received

b.

No	Date	General Journal	Debit	Credit
1	01-Sep-20	Cash	2040
		Accounts Receivable	400
		Unearned Revenue - Installation		400
		Sales Revenue		2040
		To record sales
2	01-Sep-20	Cost of goods sold	1130
		Inventory		1130
		To record cost of goods sold
3	15-Oct-20	Cash	400
		Unearned Revenue - Installation	400
		Sales Revenue		400
		Accounts Receivable		400
		To record payment received

Calculation:

a.

Entry #1:

No entry is required for entering in the contract as neither party have performed under the contract.

Entry #2:

On September 1, 2020, Sarasota has two performance obligations. That is the delivery of the windows and the installation of the windows.  

Windows    = $2,040

Installation = [$420 + (30% X $420)]   =  546

So the total is = 2,040 + 546 = 2,586

Then we need to do the allocation as below:

Windows ($2,040 ÷ $2,586) X $2,440 =  $1,925

Installation ($546 ÷ $2,586) X $2,440 = 515

Then the Revenue recognized is the total of the allocation = 1,925 + 515 = 2,440

So for sales we need to credit the sales revenue with 1,925 and Unearned Revenue - Installation with 515.

Then we need to debit the cash received  2,040 and also the Accounts Receivable with 400.

Entry #3:

Here we need to record cost of goods sold. For that we need to debit the Cost of goods sold with 1,130 and credit the Inventory.

Entry #4:

Here we need to record payment received. The sale of the windows is recognized once delivered. and the installation fee is recognized when the windows are installed. So we need to debit the cash received 400 and Unearned Revenue - Installation of 515. Then we need to credit the Sales Revenue with 515 and Accounts Receivable of 400.

b.

Entry #1:

Here Sarasota cannot estimate the costs for installation as uncertainty of finding skilled labor, Sarasota is unable to develop a reliable estimate for the standalone selling price of the installation

Sp the residual approach is used.

Here the total fair value of the contract is $2,440. The windows have a standalone fair value of $2,040.

So the allocation is $2,440 – $2,040 = 400

Windows = $2,040

Installation = 420

Total = $2,040 + 420 = 2460

So we need to record for Windows delivered, performance obligation for installation recorded.

So for sales we need to credit the sales revenue with 2,040 and Unearned Revenue - Installation with 400.

Then we need to debit the cash received  2,040 and also the Accounts Receivable with 400.

Entry #2:

Here we need to record cost of goods sold. For that we need to debit the Cost of goods sold with 1,130 and credit the Inventory.

Entry #3:

Here we need to record payment received. The sale of the windows is recognized once delivered. and the installation fee is recognized when the windows are installed. So we need to debit the cash received 400 and Unearned Revenue - Installation of 400. Then we need to credit the Sales Revenue with 400 and Accounts Receivable of 400.