Chap6-10 PDF

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Summary

On March 1, 2021, Gold Examiner receives $150,000 from a local bank and promises to deliver95 units of certiied 1-oz. gold bars on a future date. The contract states that ownership passesto the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier. Inaddition, Gold Examiner...

Description

On March 1, 2021, Gold Examiner receives $150,000 from a local bank and promises to deliver 95 units of certified 1-oz. gold bars on a future date. The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier. In addition, Gold Examiner has agreed to provide a replacement shipment at no additional cost if the product is lost in transit. The stand-alone price of a gold bar is $1,520 per unit, and Gold Examiner estimates the stand-alone price of the replacement insurance service to be $80 per unit. Brink’s picked up the gold bars from Gold Examiner on March 30, and delivery to the bank occurred on April 1. Required: 1. How many performance obligations are in this contract? Number of performance obligations : 02

2. to 4. Prepare the journal entry Gold Examiner would record on March 1, March 30 and April 1. No

Date

1

March 01, 2021

General Journal Cashselected answer correct Deferred revenue - insuranceselected answer correct Deferred revenueselected answer correct

2

3

March 30, 2021

April 01, 2021

Debit 150,000selected answer correct not attempted not attempted

Credit not attempted 7,500selected answer correct 142,500selected answer correct

Deferred revenueselected answer correct

142,500selected answer correct

not attempted

Sales revenueselected answer correct

not attempted

142,500selected answer correct

Deferred revenue - insuranceselected answer correct Service revenueselected answer correct

7,500selected answer correct not attempted

not attempted 7,500

rev: 01_06_2020_QC_CS-194667 Explanation 1. Number of performance obligations in the contract: 2. Delivery of gold is one performance obligation. The additional insurance for replacement of gold bars is a second performance obligation. The insurance service is capable of being distinct because the bank could choose to receive similar services from another insurance provider, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering gold, and the seller's role is not to integrate and customize them to create one service or product. So, the insurance qualifies as a performance obligation. The receipt of cash prior to delivery is not a performance obligation, but rather gives rise to deferred revenue associated with performance obligations to be satisfied in the future. 2.

Value of the gold bars: $1,520/unit × 95 units =

$ 144,400

Stand-alone selling price of the insurance: $80 × 95 units =

7,600

Total of stand-alone prices

$ 152,000

Gold Examiner first identifies each performance obligation’s share of the sum of the stand-alone selling prices of all deliverables:

Gold bars delivered

$144,400

=

95%

$144,400 + $7,600

$7,600 Insurance:

=

5%

$144,400 + $7,600 100%

Gold Examiner then allocates the total selling price based on stand-alone selling prices, as follows: $150,000 Transaction price × 95% = $142,500 Gold bars delivered $150,000 Transaction price × 5% = $7,500 Insurance for replacement of gold bars 3. Gold Examiner recognizes only the portion of revenue associated with passing of the legal title. The revenue associated with insurance coverage will be earned only when that performance obligation is satisfied....