Question

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires...

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,000 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $100 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of "excellent" by Wilderness customers. The $1,000 per day and any bonus due are paid in one lump payment shortly after the end of each month. On July 1, based on prior experience, Rocky estimated there is a 30% chance it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15. On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month, Rocky revised its estimate to an 80% chance it would earn the bonus for all July tours. Rocky also guided customers for 15 days from July 16–July 31. On August 5 Rocky learned it did not receive an average evaluation of “excellent” for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours. Rocky bases estimates of variable consideration on the most likely amount it expects to receive. Required: 1. to 3. Prepare the journal entries to record the transactions above. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.

Homework Answers

Answer #1
No Date General Journal Debit Credit
1) 15-Jul Accounts receivable 10000
Service revenue 10000
2) 31-Jul Accounts receivable 15000
Bonus receivable 2500
Service revenue 17500
3) 5-Aug Cash 25000
Accounts receivable 25000
4) 5-Aug Service revenue 2500
Bonus receivable 2500
Explanation:
1) only revenue recognised for 10 days tour , no bonus recognised as chances
are less than 50%
2) revenue recognised for another 15 days , also bonus recognised for 25 days (10+15)
as chances raised to 80%
3) Basic revenue received
4) Bonus entry reversed
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