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Headland Ranch & Sage is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Headland’s products. Pricing and cost information on three of Headland’s most popular products are as follows. Standalone Selling Price (Cost) Item $3,400 ($1,800) 1,300 (800 ) 14,700 (10,900) Mini-trencher Power fence hole auger Grain/hay dryer Respond to the requirements related to the following independent revenue arrangements for Headland Ranch & Sage On January 1, 2017, Headland sells 40 augers to Mills Farm & Fleet for $52,000. Mills signs a 6-month note at an annual interest rate of 12%. Headland allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Headland estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Headland’s costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entry for Headland on January 1, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold) On August 10, 2017, Headland sells 17 mini-trenchers to a farm co-op in western Minnesota. Headland provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Headland compared to the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met. Prepare the journal entry for Headland on August 10, 2017. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select “No entry” for the account titles and enter 0 for the amounts. Round intermediate calculations to 6 decimal places, e.g. 1.246576 and final answers to 0 decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold)
Expert Answer
(a) January 1, 2017
Notes Receivable (Mills)……………………………………….. 52,000
Refund Liability (5% X $52,000)…………………………….. 2,600
Sales Revenue………………………………………………………. 49,400
Cost of Goods Sold………………………………….. 30,400
Estimated Inventory Returns
(40* X $800 X 5%)…………………………………… 1,600
Inventory (40 X $800)………………………….. 32,000
*($52,000 ÷ $1,300)
(b) August 10, 2017
Cash (17 X $3,400*)………………………………………………. 57,800
Sales Revenue………………………………………………………. 57,800
Cost of Goods Sold………………………………….. 30,600
Inventory (17 X $1,800)………………………. 30,600
* Note: There is no adjustment for the volume discount, because it is not probable that the customer will reach the benchmark.
(c) This revenue arrangement has 3 different performance obligations:
(1) the sale of the dryers, (2) installation, and (3) the maintenance plan.
The total revenue of $47,500 should be allocated to the three performance obligations based on their relative fair values:
Dryers (3 X $14,700) $44,100
Installation (3 X $1,100) 3,300
Maintenance plan 1,200
Total estimated fair value $48,600
The allocation for a single contract is as follows.
Dryers $43,102 ($44,100 / $48,600) X $47,500
Installation 3,225 ($3,300 / $48,600) X $47,500
Maintenance plan 1,173 ($1,200 / $48,600) X $47,500
Total Revenue $47,500
Ritt makes the following entries.
June 20, 2017
Cash (20% X $47,500)…………………………………………….. 9,500
Accounts Receivable ($47,500 – $9,500)……………… 38,000
Unearned Service Revenue
(Installation)…………………………………….. 3,225
Unearned Service Revenue
(Maintenance Plan)………………………….. 1,173
Unearned Sales Revenue (Dryers)…….. 43,102
(To record agreement to sell and install dryers and maintenance plan)
Note: Rather than Unearned Sales Revenue, a Contract Liability Account could be used.
October 1, 2017
Cash (80% X $47,500)…………………………………………… 38,000
Accounts Receivable…………………………. 38,000
Unearned Service Revenue (Installation)……………….. 3,225
Unearned Sales Revenue (Dryers)……………………….. 43,102
Service Revenue (Installation)…………… 3,225
Sales Revenue (Dryers)……………………… 43,102
Cost of Goods Sold………………………………………………. 32,700
Inventory (3 X $10,900)…………………….. 32,700
December 31, 2017
Unearned Service Revenue (Service Plans) 98
Service Revenue (Service Plans)
($1,173 X 3/36)…………………………………. 98
(d) Entries for Headland
April 25, 2017
No entry – Inventory continues to be controlled by Headland.
June 30, 2017
Cash [(60 X $1,300) – (10% X 60 X $1,300)]………….. 70,200
Consignment Expense ……………………………. 7,800
Sales Revenue…………………………………… 78,000
Cost of Goods Sold (60 X $800)………………………….. 48,000
Inventory ……………………………………………. 48,000
Entries for Sage Depot
April 25, 2017
No entry – Inventory continues to be controlled by Headland.
Summary Entry for Consignment Sales
Cash……………………………………………………………………… 78,000
Due to Headland (Consignment)……….. 70,200
Unearned Service Revenue
(Consignments)………………………………. 7,800
June 30, 2017
Due to Headland…………………………………………………… 70,200
Unearned Service Revenue
(Consignments)……………………………………………………. 7,800
Service Revenue (Consignments)……… 7,800
Cash ………………………………………………. 70,200
