Question

Furniture Land Inc. is a producer and retailer of high-end custom-designed furniture and uses the contract-based approach to revenue recognition. The company produces only to special order and requires a one-third down payment before any work begins. The customer is then required to pay one-third at the time of delivery and the balance within 30 days after delivery.

It is now February 1, 2020, and Furniture Land has just accepted $3,400 as a down payment from H. Gooding, a wealthy stockbroker. Per the contract, Furniture Land is to deliver the custom furniture to Gooding’s residence by June 15, 2020. Gooding is an excellent customer and has always abided by the contract terms in the past. If Furniture Land cannot make the delivery by June 15, the contract terms state that Gooding has the option of cancelling the sale and receiving a full reimbursement of any down payment. It is estimated that Furniture Land’s cost to design and manufacture the furniture ordered by Gooding will be $7,140.

As Furniture Land’s accountant, prepare all journal entries related to the sale. Assume that revenue is recognized at the time of delivery. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

At the time of down payment reciept
Cash/Bank A/c	3400
Unrecognised Revenue A/c		3400
Case 1- Delivery is done on time
1) Recognition of the previously received down payment
Unrecognised Revenue A/c	3400
Revenue/Sale A/c		3400
2) Receipt of additional amount
Cash/Bank A/c	3400
Revenue/Sale A/c		3400
3) Recognising trade receivables for the sale
Goodling/Accounts Receivable A/c	3400
Revenue/Sale A/c		3400
COGS A/c	7140
Accounts Payable/Cash/Bank A/c
Case 2- Delivery is not done on time
1) Amount Returned to the customer
Unrecognised Revenue A/c	3400
To Cash/Bank		3400