Question

TreeHold Corp. designs and builds custom equipment for logging companies across Canada. The company is publicly traded and has a May 31 year end. On February 18, 2020, TreeHold signed a contract with Coastal Harvesting Ltd. to design and build 25 custom harvesters (equipment) that can harvest wood at the steep grades found along much of the Pacific coast timber stands. The following events took place in 2020:

1. February 18: Officials from freehold and Coastal sign the contract. The contract was for $4.1 million. freehold is to design, manufacture, and deliver the 25 machines to Coastal's operations center in Duncan, British Columbia. TreeHold's management estimates that the design component of the contract would be valued at $510,000 if contracted for separately, while the machine construction component of the contract would be valued at $4 million if the machines were purchased separately. TreeHold agrees to provide a three-year assurance-type warranty for the machines, and the company's management estimates that the warranty claims would total $230,000 based on past experience. Coastal agrees to pay a $1,250,000 deposit within 10 days of signing the contract and to pay the balance within 15 days of the equipment being delivered.

2. February 25: Coastal pays the deposit specified in the contract.

3. March 28: TreeHold's engineering staff complete the equipment design and it is approved by officials from Coastal.

4. May 18: TreeHold completes construction of the 25 harvesters.

5. May 20: The 25 harvesters are loaded onto TreeHold's trucks and are delivered to Coastal's operation center in Duncan later that day.

6. June 2: Coastal pays the balance owing on the contract.

Required

a. Using the five-step model for revenue recognition, determine when and how much revenue FreeHold would be able to recognize for the year ended May 31, 2020. Provide full explanations for each step in the model.

b. Prepare TreeHold's required journal entries for all of the dates appearing above along with any other necessary journal entries for the contract based on your analysis in part "a."

Answer 1

Tree Hold should record the following amount as it's revenue on the below mentioned dates for the year ended May, 31, 2020.

1. Revenue recognized on February 25, 2020 amounting to $557916.

2. Revenue recognized on May 20, 2020 amounting to $3921084 ($4479000-$557916).

2. Following will be the journal entries for the Furniture Land Inc.

Date	Particulars	Debit	Credit
February 1	Cash To unearned sales revenue (To record cash collected in advance)	3600	3600
June 15	Cash Unearned sales revenue Accounts receivable To sales revenue (to record the sale of furniture)	3600 3600 3600	10800
June 15	Cost of goods sold To cash (to record cost related to design and manufacturing of custom furniture)	7560	7560
July 15	Cash To accounts receivable (to record the collection on account)	3600	3600