For the first quarter of 2017, prepare any needed correcting or adjusting journa
ID: 2573945 • Letter: F
Question
For the first quarter of 2017, prepare any needed correcting or adjusting journal entries related to the following information. For corrections, first prepare an entry reversing the original incorrect entry, then prepare the correct entry. Show the calculation of any amounts not included in the problem. Round intermediate calculations to 4 significant digits (e.g., 63.27%). If no journal entry is needed, write “No Entry Needed” and explain briefly why it is not needed.
In addition to its normal operations, during the first quarter of 2017, TECHNOGYM entered into a long-term agreement to supply its internally developed smart-phone-interactive fitness equipment, BodyTracker, and maintenance support to a regional 24 hour fitness chain. TECHNOGYM was paid $9,000,000 during March, 2017 for the equipment plus 3 years of maintenance support (beginning on April 1, 2017—the first day of the next quarter). The fitness chain could have bought just the equipment for $7,500,000 with no support and they could have independently contracted for the maintenance support for $3,000,000 for the three year period. The cost of the equipment sold was $3,500,000. TECHNOGYM has recorded the $9,000,000 as a point-of-sale cash transaction
1. BodyTracker revenue - TECHNOGYM has recorded $9,000,000 cash collected as a point-of-sale cash transaction during March, 2017 for equipment plus 3 years of maintenance support (beginning on April 1, 2017). The fitness chain could have bought just the equipment for $7,500,000 with no support and they could have independently contracted for the maintenance support for $3,000,000 for the three year period. The cost of the equipment sold was $3,500,000.
Explanation / Answer
1. In the given case, Technogym was required to record only sale of asset as revenue transaction and remaining amount of maintenance contract should have been recorded as liability as the service is yet to be provided over three year period.
1. Journal entry passed by company
Particulars
Dr. Amount
Cr. Amount
Cash
TO Sale Revenue
9,000,000
9,000,000
NOTE: In the given case, it is assumed that equipment is not a fixed asset sold by the company rather company is having business of sale of such equipment. If it is a fixed asset, then Journal entry will be
Journal Entry that would have been passed by the company if equipment was fixed asset for company
Particulars
Dr. Amount
Cr. Amount
Cash
TO Equipment account
TO Profit on sale of equipment
9,000,000
3,500,000
5,500,000
2. Correct Journal entry required to be passed
Particulars
Dr. Amount
Cr. Amount
Cash
TO Sale Revenue
TO Unearned Revenue
9,000,000
6,000,000
3,000,000
Correct Journal entry required to be passed if equipment is fixed asset
Particulars
Dr. Amount
Cr. Amount
Cash
TO Equipment account
TO Profit on sale of equipment
TO Unearned Revenue
9,000,000
3,500,000
2,500,000
3,000,000
3. Adjusting Entry
Adjusting Journal entry to be passed
Particulars
Dr. Amount
Cr. Amount
Sale Revenue
TO Unearned Revenue
3,000,000
3,000,000
Adjusting Journal entry required to be passed if equipment is fixed asset
Particulars
Dr. Amount
Cr. Amount
Profit on sale of equipment
TO Unearned Revenue
3,000,000
3,000,000
Particulars
Dr. Amount
Cr. Amount
Cash
TO Sale Revenue
9,000,000
9,000,000