Week13-Solutions.docx - E18.29(LO4(Contract Modification In September 2019 Gaertner Corp commits to selling 150 of its iPhone-compatible docking

Week13-Solutions.docx - E18.29(LO4(Contract Modification In...

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E18.29 (LO4) (Contract Modification) In September 2019, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for $15,000 ($100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional $4,275 ($95 per station). All sales are cash on delivery. Instructions a. Prepare the journal entry for Gaertner for the sale of the first 90 stations. The cost of each station is $54. b. Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately. c. Prepare the journal entry for the sale of 10 more stations (as in (b)), assuming that the pricing for the additional products does not reflect the standalone selling price of the additional products and the prospective method is used.
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EXERCISE 18.29 (20–25 minutes) (a) Cash 9,000 Sales Revenue (90 X $100) 9,000 Cost of Goods Sold 4,860 Inventory (90 X $54) 4,860 (b) Cash 1,000 Sales Revenue (10 X $100) 1,000 Cost of Goods Sold 540 Inventory (10 X $54) 540 In this situation, the contract modification for the additional 45 products is, in effect, a new and separate contract for future products that does not affect the accounting for the previously existing contract. (c) In this case, because the new price does not reflect a stand-alone selling price, Gaertner allocates a modified transaction price (less the amounts allocated to products transferred at or before the date of the modification) to all remaining products to be transferred.
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EXERCISE 18.29 (continued) Under the prospective approach, Gaertner determines the transaction price for subsequent sales ($97.86) as follows. Consideration for products not yet delivered under original contract ($100 X 60) $ 6,000 Consideration for products to be delivered under the contract modification ($95 X 45) 4,275 Total remaining revenue $10,275 Revenue per remaining unit ($10 ,275 ¸ 105) = $97.86. As indicated, the numerator includes products not yet transferred under original contract ($100 X 60) plus products to be transferred under the contract modification ($95 X 45), which is divided by the remaining 105 products.
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