(Solved): Headland Ranch & Sage is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for

Headland Ranch & Sage is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Headlands products. Pricing and cost information on three of Headlands most popular products are as follows. Standalone Selling Price (Cost) Item $3,400 ($1,800) 1,300 (800 ) 14,700 (10,900) Mini-trencher Power fence hole auger Grain/hay dryer Respond to the requirements related to the following independent revenue arrangements for Headland Ranch & Sage On January 1, 2017, Headland sells 40 augers to Mills Farm & Fleet for $52,000. Mills signs a 6-month note at an annual interest rate of 12%. Headland allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Headland estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Headlands costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entry for Headland on January 1, 2017. (Credit account titles are automatically indented when the 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.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold) On August 10, 2017, Headland sells 17 mini-trenchers to a farm co-op in western Minnesota. Headland provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Headland compared to the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met. Prepare the journal entry for Headland on August 10, 2017. (Credit account titles are automatically indented when the 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. Round intermediate calculations to 6 decimal places, e.g. 1.246576 and final answers to 0 decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold)

Headland Ranch & Sage is a distributor of ranch and farm equipment. Its products range from small tools, power equipment for trench-digging and fencing, grain dryers, and barn winches. Most products are sold direct via its company catalog and Internet site. However, given some of its specialty products, select farm implement stores carry Headland’s products. Pricing and cost information on three of Headland’s most popular products are as follows. Standalone Selling Price (Cost) Item $3,400 ($1,800) 1,300 (800 ) 14,700 (10,900) Mini-trencher Power fence hole auger Grain/hay dryer Respond to the requirements related to the following independent revenue arrangements for Headland Ranch & Sage On January 1, 2017, Headland sells 40 augers to Mills Farm & Fleet for $52,000. Mills signs a 6-month note at an annual interest rate of 12%. Headland allows Mills to return any auger that it cannot use within 60 days and receive a full refund. Based on prior experience, Headland estimates that 5% of units sold to customers like Mills will be returned (using the most likely outcome approach). Headland’s costs to recover the products will be immaterial, and the returned augers are expected to be resold at a profit. Prepare the journal entry for Headland on January 1, 2017. (Credit account titles are automatically indented when the 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.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold) On August 10, 2017, Headland sells 17 mini-trenchers to a farm co-op in western Minnesota. Headland provides a 4% volume discount on the mini-trenchers if the co-op has a 15% increase in purchases from Headland compared to the prior year. Given the slowdown in the farm economy, sales to the co-op have been flat, and it is highly uncertain that the benchmark will be met. Prepare the journal entry for Headland on August 10, 2017. (Credit account titles are automatically indented when the 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. Round intermediate calculations to 6 decimal places, e.g. 1.246576 and final answers to 0 decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit To record sales) (To record cost of goods sold)

Expert Answer

 

(a)                                                   January 1, 2017

        Notes Receivable (Mills)……………………………………….. 52,000

               Refund Liability (5% X $52,000)……………………………..                  2,600

               Sales Revenue……………………………………………………….               49,400

        Cost of Goods Sold…………………………………..               30,400

        Estimated Inventory Returns
(40* X $800 X 5%)……………………………………                 1,600

               Inventory (40 X $800)…………………………..                                     32,000

        *($52,000 ÷ $1,300)

(b)                                                  August 10, 2017

        Cash (17 X $3,400*)………………………………………………. 57,800

               Sales Revenue……………………………………………………….               57,800

        Cost of Goods Sold…………………………………..               30,600

               Inventory (17 X $1,800)……………………….                                     30,600

* Note: There is no adjustment for the volume discount, because it is not probable that the customer will reach the benchmark.

(c)   This revenue arrangement has 3 different performance obligations:
(1) the sale of the dryers, (2) installation, and (3) the maintenance plan.

The total revenue of $47,500 should be allocated to the three performance obligations based on their relative fair values:

Dryers (3 X $14,700)                          $44,100

Installation (3 X $1,100)                        3,300

Maintenance plan                                  1,200

Total estimated fair value              $48,600

The allocation for a single contract is as follows.

Dryers                         $43,102   ($44,100 / $48,600) X $47,500

Installation                     3,225   ($3,300 / $48,600) X $47,500

Maintenance plan          1,173   ($1,200 / $48,600) X $47,500

   Total Revenue         $47,500

Ritt makes the following entries.

                                   

June 20, 2017

        Cash (20% X $47,500)…………………………………………….. 9,500

        Accounts Receivable ($47,500 – $9,500)……………… 38,000           

               Unearned Service Revenue
(Installation)……………………………………..                                        3,225

               Unearned Service Revenue
(Maintenance Plan)…………………………..                                        1,173                

               Unearned Sales Revenue (Dryers)……..                                     43,102

(To record agreement to sell and install dryers and maintenance plan)

Note: Rather than Unearned Sales Revenue, a Contract Liability Account could be used.

October 1, 2017

        Cash (80% X $47,500)…………………………………………… 38,000

               Accounts Receivable………………………….                                     38,000

        Unearned Service Revenue (Installation)……………….. 3,225

        Unearned Sales Revenue (Dryers)……………………….. 43,102

               Service Revenue (Installation)……………                                        3,225

               Sales Revenue (Dryers)………………………                                     43,102

        Cost of Goods Sold………………………………………………. 32,700

               Inventory   (3 X $10,900)……………………..                                     32,700

December 31, 2017

        Unearned Service Revenue (Service Plans)                                          98

               Service Revenue (Service Plans)
($1,173 X 3/36)………………………………….                                             98

(d)   Entries for Headland

April 25, 2017

No entry – Inventory continues to be controlled by Headland.

June 30, 2017  

        Cash [(60 X $1,300) – (10% X 60 X $1,300)]………….. 70,200

        Consignment Expense …………………………….                 7,800

               Sales Revenue……………………………………                                     78,000

        Cost of Goods Sold (60 X $800)………………………….. 48,000

               Inventory …………………………………………….                                     48,000

Entries for Sage Depot

April 25, 2017

No entry – Inventory continues to be controlled by Headland.

Summary Entry for Consignment Sales

        Cash……………………………………………………………………… 78,000

               Due to Headland (Consignment)………..                                     70,200

               Unearned Service Revenue
(Consignments)……………………………….                                        7,800

June 30, 2017

        Due to Headland…………………………………………………… 70,200

        Unearned Service Revenue
(Consignments)……………………………………………………. 7,800

               Service Revenue (Consignments)………                                        7,800

               Cash     ……………………………………………….                                     70,200

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