Question

Since 1970, Super Rise, Inc., has provided maintenance services for elevators. On January 1, 2021, Super Rise obtains a contract to maintain an elevator in a 90-story building in New York City for 10 months and receives a fixed payment of $80,000. The contract specifies that Super Rise will receive an additional $40,000 at the end of the 10 months if there is no unexpected delay, stoppage, or accident during the year. Super Rise estimates variable consideration to be the most likely amount it will receive.

 

Required:
1. Assume that, because the building sees a constant flux of people throughout the day, Super Rise is allowed to access the elevators and related mechanical equipment only between 3 a.m. and 5 a.m. on any given day, which is insufficient to perform some of the more time-consuming repair work. As a result, Super Rise believes that unexpected delays are likely and that it will not earn the bonus. Prepare the journal entry Super Rise would record on January 1.
2. Assume instead that Super Rise knows at the inception of the contract that it will be given unlimited access to the elevators and related equipment each day, with the right to schedule repair sessions any time. When given these terms and conditions, Super Rise has never had any delays or accidents in the past. Prepare the journal entry Super Rise would record on January 31 to record one month of revenue.
3. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it does not need to spend more than two hours on any given day to operate the elevator safely because the client’s elevator is relatively new. Therefore, Super Rise believes that unexpected delays are very unlikely.
Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable.

Answer 1

Requirement 1

 

Cash	80,000
Deferred revenue		80,000

 

Because Super Rise believes that unexpected delays are likely and that it will not earn the $40,000 bonus, Super Riseis not likely to receive the bonus. Thus, the $40,000 is not included in the transaction price, and only the fixed payment of $80,000 is recognized as deferred revenue.

 

Requirement 2

 

Deferred revenue ($80,000 ÷ 10) Bonus receivable ($40,000 ÷ 10)	8,000 4,000
Service revenue		12,000

 

Super Rise recognizes revenue of $12,000 associated in the month of January. Because Super Rise believesit is likely to receive the bonus, it will estimate the transaction price to be $120,000 (equal to $80,000 fixed payment + $40,000 bonus), andwill recognize 1/10 of that amount each month. 

 

Requirement 3

Deferred revenue ($80,000 ÷ 10) Bonus receivable [($40,000 ÷ 10) × 5]	8,000 20,000
Service revenue		28,000

 

Super Rise recognizes revenue of $8,000 in each month, including May, based on the original transaction of $80,000 (equal to $80,000 ÷ 10 months). However, no bonus receivable had been recognized prior to May because unexpected delays were considered likely and thus no bonus was expected. In May, Super Riseconcludes it islikely to receive the bonus, so it will revise the transaction price to $120,000 (equal to $80,000 fixed payment + $40,000 contingent bonus). This means Super Risemust record additional revenue of $20,000 to adjust revenue to the appropriate amount [($40,000 bonus receivable ÷ 10 months) × 5 months], and recognize a receivable for that amount.

Super Rise recognizes revenue of $8,000 in each month, including May, based on the original transaction of $80,000 (equal to $80,000 ÷ 10 months).