Summary Business Accounting

Question:

Velocity consulting firm enters into a contract to help Burger Boy, a fast-food restaurant, design a

marketing strategy to compete with Burger King. The contract spans eight months. Burger Boy promises

to pay $60,000 at the beginning of each month. At the end of the contract, Velocity either will give

Burger Boy a refund of $20,000 or will be entitled to an additional $20,000 bonus, depending on whether

sales at Burger Boy at the year-end has increased to a target level. At the inception of the contract,

Velocity estimates an 80% chance that it will earn the $20,000 bonus. After four months, circumstances

change and Velocity revises to 60% its estimate of the chance that it will earn the bonus. At the end of the

contract, Velocity receives the additional consideration of $20,000. Velocity accounts for this

arrangement.

Required:

1. Prepare a journal entry to record the revenue Velocity would recognize each month for the first four

months.

2. Prepare a journal entry that the Velocity Company would make after four months to record the change

in estimate associated with the likelihood that additional $20,000 would be received.

3. Prepare a journal entry to record the revenue that Velocity Company would recognize each month for

the second four months.

4. Prepare a journal entry after eight months to record resolution of the uncertainty associated with receipt

of the additional consideration of $20,000.



Answer:



Requirement 1

At the contract’s inception, Velocity would calculate the transaction price to be the probability-

weighted average of the two possible eventual prices: