On January 31, 2023, Jones & Hill, a consulting firm, entered a contract to help Dr. LuLu Love, a local pediatric dental provider, design a marketing strategy to compete with Gold Tooth Dental. The contract spans ten months. Dr. Love promises to pay $105,000 at the end of each month starting in February.
Revenue Recognition – Graded Assignment
Question 1:
On January 31, 2023, Jones & Hill, a consulting firm, entered a contract to help Dr. LuLu Love, a local pediatric dental provider, design a marketing strategy to compete with Gold Tooth Dental. The contract spans ten months. Dr. Love promises to pay $105,000 at the end of each month starting in February.
At the end of the contract, Jones & Hill either will give Dr. Love a refund of $200,000 or will be entitled to an additional $200,000 bonus, depending on whether services at Dr. Love’s practice at year-end have increased to a target level.
At the inception of the contract, Jones & Hill estimates a 75% chance that it will earn the $200,000 bonus and calculates the contract price based on the expected value of future payments to be received.
At the beginning of the fifth month and after recording the May 31st entry , circumstances change, and Jones & Hill revises to 60% its estimate of the probability that it will earn the bonus.
Assume Jones & Hill has an April 30th year-end.
Required (Show your work to support amounts and do not round, show two decimal places unless the calculated amount is a whole dollar):
1. Record the journal entry necessary on February 28, 2023.
2. Record the adjusting entry on June 1st to adjust the bonus receivable and revenue based on the revised estimate.
3. Record the new journal entry on June 30, 2023
4. Record the entry on November 30, 2023, assuming Jones & Hill receive the bonus.
5. Record the entry on November 30, 2023, assuming Jones & Hill do not receive the bonus.
6. After all entries have been recorded, indicate the total revenue recognized under each scenario and explain why this makes sense.
7. Indicate amounts that would be reported by Jones & Hill on April 30, 2023 on the Balance sheet and Income statement.
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