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On May 1, 2018, Meta Computer, Inc., enters into a contract to sell 5,000 units of Comfort Office Keyboard to one of its clients, Bionics, Inc., at a fixed price of $95,000, to be settled by a cash payment on May 1. Delivery is scheduled for June 1, 2018. As part of the contract, the seller offers a 25% discount coupon to Bionics for any purchases in the next six months. The seller will continue to offer a 5% discount on all sales during the same time period, which will be available to all customers. Based on experience, Meta Computer estimates a 50% probability that Bionics will redeem the 25% discount voucher, and that the coupon will be applied to $20,000 of purchases. The stand-alone selling price for the Comfort Office Keyboard is $19.60 per unit.

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Answer:

Journal entries

Explanation:

1. There are two performance obligations in this contract

2. The journal entry is as follows

Cash Dr $95,000

    To Unearned sales revenue $93,100

    To Unearned discount sales revenue $1,900

(Being the unearned revenue is recorded)

The computation of the unearned discount sales revenue is shown below:

= $95,000 × $2,000 ÷ $100,000

= $1,900

The $2,000 is come from

= $20,000 ×(25% - 5%) × 50%

= $2,000

And, the $100,000 is come from i.e sales revenue including discount

= $98,000 + ($20,000  × 20% × 50%)

=$100,000

And, $98,000 is come from  i.e sales revenue

= 5,000 units × $19.60 per unit

= $98,000

3. And, the journal entry is as follows

Cash Dr $95,000

      To Unearned sales revenue $95,000

(Being the unearned sales revenue is recorded)

The number of performance obligations that are in this contract is two.

The journal entry that will be recorded by Meta on May 1, 2016 will be:

  • Debit Cash $95,000
  • Debit Unearned sales revenue $93,100
  • Credit Unearned discount sales revenue $1,900

(Being the unearned revenue recorded)

It should be noted that the calculation for the unearned discount sales revenue is given as:

= ($95,000 × $2,000) / $100,000

= $1,900

If Meta gives a 5% discount option to Bionics instead of 25%, the journal entry that Meta record on May 1, 2016 will be:

  • Debit Cash $95,000
  • Credit Unearned sales revenue $95,000

(Being the unearned sales revenue recorded)

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