Chapter 18: Revenue Recognition

Question 1

What is the 5-step process for revenue recognition?

Answer 1

1. Identify the contract with customers
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the separate performance obligations.
5. Recognize revenue when each performance obligation is satisfied.

Question 2

——————– Background Information———————
Washington Company sells jumbo flat screen televisions. Customers are finicky about the way the jumbo flat screens look in their home, so Washington Company estimates 10% of televisions will be returned. All sales are made on account.

——————– Question ———————-
In 2021, Washington Company sells 10,000 flat
screen televisions for $1,500 each. The cost of the televisions is $900 each.

What is the journal entry to record the sale of the TV’s?

Answer 2

To record the sale of the televisions:
Dr. Accounts Receivable 15,000,000
Cr. Sales Revenue 15,000,000

1,500,000 = 10,000 x $1,500

Question 3

——————– Background Information———————
Washington Company sells jumbo flat screen televisions. Customers are finicky about the way the jumbo flat screens look in their home, so Washington Company estimates 10% of televisions will be returned. All sales are made on account.

——————– Question ———————-
During the course of the year, 780 televisions are returned.

What is the journal entry to record the return of the TV’s?

Answer 3

To record the return of 780 televisions:

Dr. Sales Returns and Allowances 1,170,000
Cr. Accounts Receivable 1,170,000
1,170,000 = 780 * $1,500

Sales returns and allowances is a contra-account to revenue.

To record the anticipated return of 220 televisions:

Dr. Sales Returns and Allowances 330,000
Cr. Allowance for Sales Returns 330,000

Allowance account is created for the returns that are expected to occur next year.