Cool-IT Ltd. manufactures and sells air conditioning equipment to retailers across North America. In 2020, Cool-IT signed a two-year contract with BigMart Ltd. to supply it with 60,000 units at a price of $75 per unit. Cool-IT’s cost to manufacture these units is $52. The following schedule summarizes the production, delivery, and payments in relation to the contract. Production costs are recorded to inventory:

Required 

a. Determine how much revenue Cool-IT would be able to recognize in 2020 and 2021. Use the five-step model for revenue recognition in preparing your response.

b. Prepare the required summary journal entries for the contract based on your analysis in part “a.”

c. How would your answer to part “a” change if Cool-IT allowed BigMart to return any air conditioners that were returned by its customers as defective? Based on past experience, Cool-It’s management estimated a return rate of 2% and that the air conditioners being returned would need to be scrapped.

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2020 38,000 2021 Total 60,000 $3,120,000 $4,200,000 Air conditioning units delivered Production costs incurred Cash payments received 22,000 $1,976,000 $2,430,000 $1,144,000 $1,770,000