Fields Advertising Associates signs a 5-year contract with Abbot Manufacturing, Inc., for $6,000,000 which is payable evenly
Question:
Fields Advertising Associates signs a 5-year contract with Abbot Manufacturing, Inc., for $6,000,000 which is payable evenly at the end of each of the next five years. Under the terms of the agreement, Fields will promote Abbot’s products in print, television, and social media. Fields will receive a bonus based on Abbot’s cumulative sales levels at the end of the contract. The bonus if any is paid at the end of the contract. The terms of the bonus agreement are presented below.
Cumulative Sales Level | Bonus Percentage | Bonus as a percent of $6,000,000 |
$40,000,000 | 35% | $2,100,000 |
30,000,000 | 20% | 1,200,000 |
15,000,000 | 12% | 720,000 |
10,000,000 | 10% | 600,000 |
Fields estimates the probabilities of reaching each of the cumulative sales levels as follows:
Cumulative Sales Level | Sales Level Probability |
$40,000,000 | 25% |
30,000,000 | 40% |
15,000,000 | 30% |
10,000,000 | 5% |
REQUIRED:
a. Prepare all journal entries necessary to record the contract at inception and at the end of Year 1 assuming that the Expected Value Method is used. You do not need to consider if the variable consideration is constrained.
b. Prepare all journal entries necessary to record the contract at inception and at the end of Year 1 if the Most Likely Amount Method is used. You must consider if the estimate of the amount of variable consideration is constrained in this part of the question.
Expert Answer:
