Reference no: EM132890233
Problem - Variable Consideration and Performance Obligations Satisfied over Time - On January 2, 2019, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $3 million, and construction is expected to take 18 months. Drewry is billed and pays $1,500,000 of the contract price on January 2, 2019, and will pay the balance at completion.
TI estimates that the cost of construction will be $2.2 million.
Drewry includes two performance bonuses in the contact:
U.S. Bonus: If the equipment design receives a U.S. patent by March 15, 2020, Drewry will pay a $300,000 bonus.
International Bonus: If the equipment receives approval for international distribution by January 31, 2020, Drewry will pay a $1,000,000 bonus.
The bonuses are payable when a U.S. patent is approved and when international distribution is approved.
On the date the contract is signed, IT estimates that there is an 80% chance it will receive U.S. patent protection by March 15, 2020, but only a 30% chance that the equipment will be approved for international distribution.
TI received a U.S. patent on the equipment design on November 15, 2019, and immediately billed Drewry and received its bonus payment. On December 31, 2019, TI has incurred $1,760,000 of contract costs and is 80% complete. TI won approval for international distribution on January 15, 2020, and completed the equipment project on April 15, 2020, at a cost of $2,200,000.
Required -
1. Identify the performance obligations in the contract.
2. Provide the journal entries that TI should make to recognize revenue from the contract.
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