P 65 Variable consideration

LO63, LO66

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 $20,000 from Green at the end of each month. If total cost savings reach a specific target, Revis will receive an additional $10,000 from Green at the end of the contract, but if total cost savings fall short, Revis will refund $10,000 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 months revenue.

2. Assuming total cost savings exceed target, prepare the journal entry on June 30 to record receipt of the bonus.

3. Assuming total cost savings fall short of target, prepare the journal entry on June 30 to record payment of the penalty.