On January 1, 2017, Carly Fashions Inc. enters into a contract with a regional retail company to provide 500 blouses for $20,000 over the next 10 months. On September 1, 2017, after 400 of the blouses had been delivered (50 blouses per month), the contract is modified.
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Required:
Fifty blouses were delivered each month for the first 8 months of 2017. Prepare Carly Fashions's monthly journal entry to record revenue.Assume that the contract is modified on September 1 to sell, once the original 500 blouses are delivered, an additional 100 blouses at $35 per blouse, which is the stand-alone selling price on October 1, 2017. The additional blouses are to be delivered in November. Prepare the November journal entry to record the contract modification.Assume instead that the contract is modified on September 1 to alter the price of the additional 100 blouses to $35 per blouse, which is the stand-alone selling price on October 1, 2017. Assume the blouses are delivered evenly on September 1 and October 1, 2017. Prepare the journal entries for September and October to record this contract modification.
What will be an ideal response?
Monthly entry January through August:?Cash (50 blouses × $40 per blouse) ....................................... 2,000Sales Revenue. ........................................................ 2,000 ?Because the additional blouses are distinct and the price reflects the stand-alone selling price, the modification will be considered a separate contract. Therefore, Spring Fashions will make the following entry to record the delivery of the dresses in November:?Cash (50 blouses × $35 per blouse) ....................................... 3,500Sales Revenue. ........................................................ 3,500 ?Because the selling price does not involve distinct goods, this modification would not be considered a separate contract. Carly Fashions should use a cumulative catch-up approach. Therefore, Carly will account for the goods as if the original contract specified total revenues of $19,500 (an average of $39 per blouse; 400 blouses @ $40 plus 100 blouses @ $35). Because Carly had previously recognized $16,000 (400 blouses @ $40), it must reduce revenue by $400 ($16,000 - $15,600) at the time of the modification by making the following journal entry:?Sales Revenue........................................................ 400 Unearned Revenue. ........................................................ 400 ? Then, Carly will record the sale of 50 blouses in September and again in October as?Cash (50 blouses × $35 per blouse) ....................................... 1,750Unearned Revenue. ........................................................ 200Sales Revenue. (50 blouses × $39 per blouse).............................. 1,950 ??
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