Question

Markley Windows manufactures and sells custom storm windows for enclosed porches. Markley also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be provided by other vendors. Markley enters into the following contract on April 1, 2018, with a local homeowner. The customer purchases windows for a price of $7,000 and chooses Markley to do the installation. Markley charges the same price for the windows irrespective of whether it does the installation or not. The price of the installation service is estimated to have a fair value of $1,800. The customer pays Markley $6,000 (which equals the fair value of the windows, which have a cost of $3,500) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on June 1, 2018, Markley completes installation on July 15, 2018, and the customer pays the balance due.

Instructions

Prepare the journal entries for Markley in 2018. (Round amounts to nearest dollar.)

Answer 1

Fir Value Total

Markley = $6,000

Installation           = $1800

Total                    = $7,800

Allocation

Markley ($6000/7800) x $7000       = $5,385

Installation ($1800/7800) x $7000   = $1615

Total Revenue recognized = $7000

Journal entries for Markley in 2018

April 1, 2018

No entry

June 1, 2018

Dr         Cash                                    $6000

Dr         Accounts Receivable           $1000

Cr          Unearned Service Revenue                      $1615

Cr          Sales revenue                                           $5385

June 1, 2018

Dr         Cost of goods Sold              $3500

Cr          Inventory                                                          $3500

July 15, 2018

Dr         Cash                                              $1000

Dr         Unearned Service Revenue $1615

Cr          Service Revenue $1615

Cr          Accounts Receivable $1000