On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green
Question:
On January 1, Revis Consulting entered into a contract to complete a cost reduction program for Green Financial over a six-month period. Revis will receive $44,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $22,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $22,000 to Green. Revis estimates an 80% chance that cost savings will reach the target and calculates the contract price based on the expected value of future payments to be received.
Required:
Prepare the following journal entries for Revis:
1. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue,
2. Assuming total cost savings exceed the target, record the entry on June 30 for receipt of the bonus and
3. Assuming total cost savings fall short of the target and record the entry on June 30 for payment of the penalty.
South Western Federal Taxation 2016 Corporations Partnerships Estates and Trusts
ISBN: 9781305399884
39th edition
Authors: James Boyd, William Hoffman, Raabe, David Maloney, Young