Question

Master Grill Company sells outdoor grilling products, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations. Master Grill offers contract MG100 which is comprised of a free-standing gas grill for small patio use plus installation to a customer’s gas line for a total price $1,150. On a standalone basis, the grill sells for $850 (cost $650), and Master Grill estimates that the fair value of the installation service is $400. Master Grill signed 20 MG100 contracts on May 30, 2021, and customers paid the contract price in cash. The grills were delivered and installed on June 15, 2021.

Instructions:

1. Allocate the contract price to the two separate performance obligations.

2. Prepare journal entries for Master Grill for MG100 in May and June 2021.

Answer 1

Total revenue = contract sales price * No. of contracts = 1150 * 20 = 23000

allocated to the two performanceobligations based on their relative fair values.

grill sells = 20 * 850 = 17000

Installation service = 20 * 400 = 8000

Total (when individually provided) = 17000 + 8000 = 25000

Allocation to grills = 17000/25000 * 23000 = 15640

Installation service = 8000/25000 * 23000 = 7360

Journal Entry

Cash A/c Dr 23000

To Unearned Service installation 7360

To Unearned Grills 15640

Unearned Service installation 7360

Unearned Grills 15640

To Service installation 7360

To  Unearned Grills 15640

Cost of Goods sold A/c Dr 13000

To inventory A/c 13000

(650*20)