Question

Requirements: Provide a short answer to each independent scenario.

Jiminy Corp. enters into a sales contract. The contract specifies only one performance obligation. Jiminy completes the performance obligation by delivering the promised goods. As specified in the sale contract, Jiminy will receive $50,000 for satisfaction of the performance obligation, which will be paid in monthly installments over the three-year period upon delivery. Assume that Jiminy expects to receive the full contract price from the customer. Will Jiminy have recognized more than, less than, or exactly $50,000 of sales revenue related to the contract? Why?

Monstro Corp. accepts $1,000 of goods on consignment from Donkey Corp. Donkey sells them for $1,500, charging a commission of 10% of sale price. Monstro has not received the cash yet. Provide the journal entries, if necessary, of the transfer and sale for both corporations.

      

On August 1^st, Blue Fairy Inc. enters into a contract with Gideon Video to add their programs to Blue Fairy's network. Gideon will pay Blue Fairy an upfront fee of $250,000 fixed fee for 12 months of access, and will also pay a $100,000 bonus if Agee's users access Gideon Video for at least 10,000 hours during the 12 month period. Blue Fairy estimates that it has a 70% chance of earning the $100,000 bonus. Using the expected value approach, how much revenue will Blue Fairy recognize assuming fiscal year end of December 31^st.

Answer 1

I) In this case performance obligation is delivery of promised goods. Jiminy completes the performance obligation by delivering the promised goods. So, Jiminy would have recognized exactly $50,000 of sales revenue related to the contract, since the sole performance obligation i.e. delivery of promised goods has already been performed.

II)

In the books of Monstro Corp.(Consignor)

	DEBIT $	CREDIT $
Consignment inventory	1,000
Inventory		1,000
(Goods transferred by consignor to consignee)

In the books of Donkey Corp.(Consignee)

DEBIT $ CREDIT $ Cash 1,500 Consignor personal account 1,500 ( Consignee sells the goods on behalf of consignor) Consignor personal account 150 Commission income 150 (Consignee records commission) III) Revenue to be recognized (Dec.31st) = Fixed fee + Expected Bonus      (Using Expected Value Approach)                                        = $ 2,50,000 + (1,00,000 × 70%)                                        = $ 2,50,000 + 70,000                                        = $ 3,20,000