On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $3,200,000, and construction is expected to take 18 months. Drewry is billed and pays $1,600,000 of the contract price on January 2, 2019, and will pay the balance at completion. TI estimates that the cost of construction will be $2,300,000. Drewry includes two performance bonuses in the contact: • U.S. Bonus: If the equipment design receives a U.S. patent by March 15, 2020, Drewry will pay a $200,000 bonus. • International Bonus: If the equipment receives approval for international distribution by January 31, 2020, Drewry will pay a $1,000,000 bonus. The bonuses are payable when a U.S. patent is approved and when international distribution is approved. On the date the contract is signed, TI estimates that there is an 80% chance it will receive U.S. patent protection by March 15, 2020, but only a 30% chance that the equipment will be approved for international distribution. TI received a U.S. patent on the equipment design on November 15, 2019, and immediately billed Drewry and received its bonus payment. On December 31, 2019, TI has incurred $1,840,000 of contract costs and is 80% complete. TI won approval for international distribution on January 15, 2020, and completed the equipment project on April 15, 2020, at a cost of $2,300,000. Required: 1. Identify the performance obligations in the contract. 2. Provide the journal entries that TI should make to recognize revenue from the contract.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter17: Advanced Issues In Revenue Recognition

Section: Chapter Questions

Problem 6P

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On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $3,200,000, and construction is expected to take 18 months. Drewry is billed and pays $1,600,000 of the contract price on January 2, 2019, and will pay the balance at completion.

TI estimates that the cost of construction will be $2,300,000.

Drewry includes two performance bonuses in the contact:

•	U.S. Bonus: If the equipment design receives a U.S. patent by March 15, 2020, Drewry will pay a $200,000 bonus.
•	International Bonus: If the equipment receives approval for international distribution by January 31, 2020, Drewry will pay a $1,000,000 bonus.

The bonuses are payable when a U.S. patent is approved and when international distribution is approved.

On the date the contract is signed, TI estimates that there is an 80% chance it will receive U.S. patent protection by March 15, 2020, but only a 30% chance that the equipment will be approved for international distribution.

TI received a U.S. patent on the equipment design on November 15, 2019, and immediately billed Drewry and received its bonus payment. On December 31, 2019, TI has incurred $1,840,000 of contract costs and is 80% complete. TI won approval for international distribution on January 15, 2020, and completed the equipment project on April 15, 2020, at a cost of $2,300,000.

Required:

1.	Identify the performance obligations in the contract.
2.	Provide the journal entries that TI should make to recognize revenue from the contract.

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