Question

Velocity consulting firm enters into a contract to help Burger Boy, a fast-food restaurant, design a marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises to pay $60,000 at the beginning of each month. At the end of the contract, Velocity either will give Burger Boy a refund of
$20,000 or will be entitled to an additional $20,000 bonus, depending on whether sales at Burger Boy at the year-end has increased to a target level. At the inception of the contract, Velocity estimates an 80% chance that it will earn the $20,000 bonus. After four months, circumstances change and Velocity revises to 60% its estimate of the chance that it will earn the bonus. At the end of the contract, Velocity receives the additional consideration of $20,000. Velocity accounts for this arrangement.
Required:
1. Prepare a journal entry to record the revenue Velocity would recognize each month for the first four months.
2. Prepare a journal entry that the Velocity Company would make after four months to record the change in estimate associated with the likelihood that additional $20,000 would be received.
3. Prepare a journal entry to record the revenue that Velocity Company would recognize each month for the second four months.
4. Prepare a journal entry after eight months to record resolution of the uncertainty associated with receipt of the additional consideration of $20,000.



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  • CreatedDecember 23, 2013
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