Question

Waterway Windows manufactures and sells custom storm windows for three-season porches. Waterway also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Waterway enters into the following contract on July 1, 2017, with a local homeowner. The customer purchases windows for a price of $2,440 and chooses Waterway to do the installation. Waterway charges the same price for the windows irrespective of whether it does the installation or not. The installation service is estimated to have a standalone selling price of $630. The customer pays Waterway $2,040 (which equals the standalone selling price of the windows, which have a cost of $1,130) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2017, Waterway completes installation on October 15, 2017, and the customer pays the balance due. Prepare the journal entries for Waterway in 2017.

Answer 1

Answer:

On July 1, 2017, Waterway enters into a contract with a customer for the purchase and installation of window for a price of $2,400.

Hence, there is no journal entry.

On September 1,2015.

Total = Windows + Installation

        =  $2,040 + $630

        = $2,670

Revenue recognized:

= Installation  + Windows

= [($630 ÷ $2,670) × $2,440] + [($2,040 ÷ $2,670) × $2,440]

= (0.2359 × $2,440) + (0.7640 × $2,440)

= $576 + $1,864

= $2,440

Therefore, the journal entries are as follows:

On September 1,

(i)

Cash A/c                         Dr. $2,040

Account receivable A/c Dr. $400

       To unearned service revenue         $576

       To sales revenue                              $1,864            

(ii) Cost of goods sold A/c Dr. $1,130

               To Inventory A/c                 $1,130

On 15 October,

Cash A/c                                     Dr. $400

Unearned service revenue A/c Dr. $576

              To Service revenue (installation)               $576

              To Accounts receivable                              $400

(Revenue recognized after service provided)