Question

Buffalo Windows manufactures and sells custom storm windows for three-season porches. Buffalo also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Buffalo enters into the following contract on July 1, 2017, with a local homeowner. The customer purchases windows for a price of $ 2,470 and chooses Buffalo to do the installation. Buffalo charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of $ 580. The customer pays Buffalo $ 1,940 (which equals the standalone selling price of the windows, which have a cost of $ 1,050) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2017, Buffalo completes installation on October 15, 2017, and the customer pays the balance due.

(a) Buffalo estimates the standalone selling price of the installation based on an estimated cost of $ 450 plus a margin of 30% on cost. Prepare the journal entries for Buffalo in 2017.

(b) Given uncertainty of finding skilled labor, Buffalo is unable to develop a reliable estimate for the standalone selling price of the installation. Prepare the journal entries for Buffalo in 2017.

Answer 1

Solution:-

(a) Buffalo estimates the standalone selling price of the installation based on an estimated cost of $ 450 plus a margin of 30% on cost. Prepare the journal entries for Buffalo in 2017:-

• Fair value = standalone price of installation + standalone price of windo

= [ 450 + 450 * 10%] + $ 1,940

= [ 450 + 45 ] + 1940

= $2,435

Fair value = $2,435

Date	Accounts title and explanation	Debit	Credit
July 1 ,2017	No entry
september- 1-2017	Cash	$1,940
	Sales revenue =( Cash / fair value) * (Customer purchased window price)		= (1,940 / 2,435 ) * 2,470 = $1,967.88
	Unearned service revenue =( standalone selling price / fair value ) *  (Customer purchased window price)		= (580 / 2,435 ) *  2,470 = $588.33
	Account receivable = (sales revenue + unearned service revenue ) - cash	=  1,967.88 + 588.33 - 1,940 = $616.21
	(To record delivery and installation expense)
september- 1-2017	Cost of goods sold	$ 1,050
	Inventory		$ 1,050
	( To record cost of goods sold)
october - 15-2017	Cash	$616.21
	Unearned service revenue	$588.33
	servi9ce revenue		$588.33
	Accounts receivable =( Cash + unearned service revenue - service revenue)		= (616.21 + 588.33 - 588.33) = $616.21
	(To record the cash collected and service revenue)

(b) Given uncertainty of finding skilled labor, Buffalo is unable to develop a reliable estimate for the standalone selling price of the installation. Prepare the journal entries for Buffalo in 2017;-

• Without the dependable estimate,the contract cost is united as the reasonable value.accordingly,

So, fair value = $2,470

Standalone price of installation = fair value - standallone price of window

= 2,470 - 1,940

Standalone price of installation = $530

Date	Accounts title and explanation	Debit	Credit
July 1 ,2017	no entry
september- 1-2017	Cash	$1,940
	Sales revenue		= (1,940 /  2,470 ) *  2,470 = $1,940
	Unearned service revenue		= (530 /  2,470 ) * 2,470 = $530
	Accounts receivable		= 1,940 - 1,940 + 530 = $530
	( To record delivery and installation expense)
september 1 ,2017	Cost of goods sold	$ 1,050
	Inventory		$ 1,050
	(To record cost of goods sold)
october 15,2017	Cash	$530
	unearned service revenue	$530
	service revenue		$530
	Accounts receivable		= 530-530+530 = $530
	(To record the cash collected and service revenue)