Question

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 $2,500 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $250 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 $2,500 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 there is a 40% chance 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 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.)

1. Record Rocky's July 15 journal entry to record revenue for tours given from July 1 - July 15.

2. Record Rocky's July 31 journal entry to record revenue for tours given from July 16 - July 31.

3. Record Rocky's August 5 journal entry to record the receipt of payment from Wilderness.

4. Record Rocky's August 5 journal entry to record any necessary adjustments to revenue.

Answer 1

SOLUTION

Date	Accounts title and Explanation	Debit ($)	Credit ($)
July 15	Accounts receivable ($2,500 * 10 days)	25,000
	Service revenue		25,000
July 31	Accounts receivable ($2,500 * 15days)	37,500
	Bonus receivable [(10days + 15 days)*$250]	6,250
	Service revenue		43,750
Aug.5	Cash ($37,500 + $25,000)	62,500
	Accounts receivable		62,500
Aug.5	Service revenue	6,250
	Bonus receivable		6,250

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 $2,500 per day * 10days = $25,000.

2. During the July 16 -­July 31 period, Rocky earns guide revenue of another 15 days * $2,500 per day = $37,500. 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 $250 per day * (10 days + 15 days) = $6,250.

3. On August 5, Rocky learns that it won’t receive a bonus, and receives only the $62,500 ($25,000 + $37,500) balance in accounts receivable.

Rocky must reduce its bonus receivable to zero and record the offsetting adjustment in revenue.