Question

Assume the same facts as P 6–6.

 

Required:
1. Assume that Super Rise anticipates it will earn the performance bonus, but is highly uncertain about its estimate given unfamiliarity with the building and uncertainty about its access to the elevators and related equipment.
Prepare the journal entry Super Rise would record on January 1.
2. Assume the same facts as requirement 1. In addition assume that, on May 31, Super Rise determines that it has sufficient experience with the company to make an accurate estimate of the likelihood that it will earn the performance bonus, and concludes that it is likely to earn the performance bonus. Prepare the journal entry Super Rise would record on May 31 to recognize May revenue and any necessary revision in its estimated bonus receivable.

 

P 6–6

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.

Answer 1

Requirement 1

 

Cash	80,000
Deferred revenue		80,000

 

Because Super Rise has high uncertainty about its bonus estimate, it can’t argue that it is probable that it won’t have to reverse (adjust downward) a significant amount of revenue in the future because of a change in its estimate. Therefore, 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) × 5]	8,000 20,000
Service revenue		28,000

 

Super Rise recognizes revenue of $8,000 in the month of May based on the original transaction of $80,000 (equal to $80,000 ÷ 10 months). In addition, now that Super Risecan make an accurate estimate, it can argue that it is probable that it won’t have to reverse (adjust downward) a significant amount of revenue in the future because of a change in its estimate. Therefore, Super Rise 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.

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.