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Kids sells academic books and online access to worked examples and activities for most school subjects.  During November 2020, Bayview School signed a contracted with Smart Kids and ordered academic books and a one-year online access to worked examples and activities for the 2021 academic year.  The contract price amounted to $100,000.The stand-alone selling prices for similar customers online is $80,000 for books and $40,000 for online access to worked examples and activities for a year.Smart Kids delivered the books on 1 December 2020.  And the online access has been activated for all Bayview school computers on 1 January 2021.Bayview School paid the full contract price on 20 December 2020.Bayview School uses the balance sheet approach for recording deferrals.Ignore GST.Required:If Smart Kids’ balance date is 30 June 2021, what is the adjusting journal entry to be recorded on 30 June 2021?Question 7Answera.DR Revenue received in advance – Books $66,667 and DR Revenue received in advance – Online access $16,667; and CR Revenue $83,334b.DR Revenue received in advance – Online access $33,333; and CR Revenue – Online access $33,333c.DR Revenue received in advance – Books $66,667 and DR Revenue received in advance – Online access $33,333; and CR Revenue $100,000d.DR Revenue received in advance – Online access $16,667; and CR Revenue – Online access $16,667

Question

Kids sells academic books and online access to worked examples and activities for most school subjects.  During November 2020, Bayview School signed a contracted with Smart Kids and ordered academic books and a one-year online access to worked examples and activities for the 2021 academic year.  The contract price amounted to 100,000.Thestand−alonesellingpricesforsimilarcustomersonlineis100,000.The stand-alone selling prices for similar customers online is 80,000 for books and 40,000foronlineaccesstoworkedexamplesandactivitiesforayear.SmartKidsdeliveredthebookson1December2020. AndtheonlineaccesshasbeenactivatedforallBayviewschoolcomputerson1January2021.BayviewSchoolpaidthefullcontractpriceon20December2020.BayviewSchoolusesthebalancesheetapproachforrecordingdeferrals.IgnoreGST.Required:IfSmartKids’balancedateis30June2021,whatistheadjustingjournalentrytoberecordedon30June2021?Question7Answera.DRRevenuereceivedinadvance–Books40,000 for online access to worked examples and activities for a year.Smart Kids delivered the books on 1 December 2020.  And the online access has been activated for all Bayview school computers on 1 January 2021.Bayview School paid the full contract price on 20 December 2020.Bayview School uses the balance sheet approach for recording deferrals.Ignore GST.Required:If Smart Kids’ balance date is 30 June 2021, what is the adjusting journal entry to be recorded on 30 June 2021?Question 7Answera.DR Revenue received in advance – Books 66,667 and DR Revenue received in advance – Online access 16,667;andCRRevenue16,667; and CR Revenue 83,334b.DR Revenue received in advance – Online access 33,333;andCRRevenue–Onlineaccess33,333; and CR Revenue – Online access 33,333c.DR Revenue received in advance – Books 66,667andDRRevenuereceivedinadvance–Onlineaccess66,667 and DR Revenue received in advance – Online access 33,333; and CR Revenue 100,000d.DRRevenuereceivedinadvance–Onlineaccess100,000d.DR Revenue received in advance – Online access 16,667; and CR Revenue – Online access $16,667

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Solution

The correct answer is b. DR Revenue received in advance – Online access 33,333;andCRRevenue–Onlineaccess33,333; and CR Revenue – Online access 33,333.

Here's the step-by-step explanation:

  1. The total contract price is 100,000,whichisallocatedbetweenthebooksandtheonlineaccessbasedontheirstand−alonesellingprices.Thebookshaveastand−alonesellingpriceof100,000, which is allocated between the books and the online access based on their stand-alone selling prices. The books have a stand-alone selling price of 80,000 and the online access has a stand-alone selling price of 40,000.Therefore,thetotalstand−alonesellingpriceis40,000. Therefore, the total stand-alone selling price is 120,000.

  2. The allocation of the contract price between the books and the online access is done proportionately based on their stand-alone selling prices. Therefore, the books get 80,000/120,000 * 100,000 = 66,667ofthecontractpriceandtheonlineaccessgets40,000/120,000∗100,000=66,667 of the contract price and the online access gets 40,000/120,000 * 100,000 = 33,333 of the contract price.

  3. The books were delivered in December 2020 and the online access was activated in January 2021. Therefore, as of 30 June 2021, the online access has been provided for 6 months out of the 12 months in the contract. Therefore, half of the revenue for the online access should be recognized, which is 1/2 * 33,333=33,333 = 16,667.

  4. However, since Bayview School uses the balance sheet approach for recording deferrals, the entire amount of 33,333fortheonlineaccessisinitiallyrecordedasaliability(revenuereceivedinadvance).Therefore,theadjustingentryon30June2021istodebit(reduce)thisliabilityby33,333 for the online access is initially recorded as a liability (revenue received in advance). Therefore, the adjusting entry on 30 June 2021 is to debit (reduce) this liability by 16,667 and credit (increase) revenue by the same amount.

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