On January 1 2017 Piper Company entered into an agreement
On January 1, 2017, Piper Company entered into an agreement with Save Mart to sell its most popular product, the gadget. The contract stipulates that the price per unit will decrease as Save Mart purchases higher volumes of the gadget, as follows:
The contract states that Save Mart pays Piper the unit price based on the current sales volume. Once a volume threshold is reached, the price is retroactively reduced to the applicable price per unit. Based on its past experience with similar contracts, Piper believes that the total sales volume for the year will be 1,800 units and uses the most likely amount approach to estimate variable consideration. In addition, Piper concludes it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty surrounding the variable consideration is resolved
1. Determine the transaction price per unit that Piper should use to record revenue.
2. Assume that Save Mart purchases 800 units in the first quarter of 2017 and 900 units in the second quarter of 2017. Prepare Piper’s journal entries to record the sales in the first and second quarters.
3. Given the higher than expected sales volume in the first half of the year, Piper increases its estimate of the sales volume to 2,800 units. Prepare the journal entry to record this change in estimate.
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