Question: On January 2, 2017, 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, 2017, and will pay the balance at completion.
TI estimates that the cost of construction will be $2,200,000.
Drewry includes two performance bonuses in the contact:
• U.S. Bonus: If the equipment design receives a U.S. patent by March 15, 2018, Drewry will pay a $500,000 bonus.
• International Bonus: If the equipment receives approval for international distribution by January 31, 2018, 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, 2018, 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, 2017, and immediately billed Drewry and received its bonus payment.
On December 31, 2017, TI has incurred $1,760,000 of contract costs and is 80% complete. TI won approval for international distribution on
January 15, 2018, and completed the equipment project on April 15, 2018, at a cost of $2,200,000.
Required: 1. Identify the performance obligations in the contract.
2. Provide the journal entries that TI should make to recognize revenue from the contract.
Identify the performance obligations in the contract. Check all that apply.
Build the new piece of equipment
Acquire the patent.
Receive international distribution approval
Prepare the journal entries to record
1. the initial contract billing and receipt on January 2, 2017
2. the patent billing and receipt on November 15
3. contract costs incurred for the year on December 31
4. profit recognized for the year on December 31
5. the partial contract billing and receipt on January 15, 2018
6. costs incurred for the year to date on April 15
7. profit recognized for the year to date on April 15
8. the final entry to close the construction accounts on April 15, 2018