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Exercise 5–10

Rocky Guide Service provides guided 1–5 day hiking tours throughout the Rocky Mountains. Wilderness Tours hires Rocky to lead various tours that Wilderness sells. Rocky receives $1,000 per tour day, and shortly after the end of each month Rocky learns whether it will receive a $100 bonus per tour day it guided during the previous month if its service during that month received an average evaluation of “excellent” by Wilderness customers. The $1,000 per day and any bonus due are paid in one lump payment shortly after the end of each month.

• On July 1, based on prior experience, Rocky estimated that there is a 30% chance that it will earn the bonus for July tours. It guided a total of 10 days from July 1–July 15.

• On July 16, based on Rocky’s view that it had provided excellent service during the first part of the month,

Rocky revised its estimate to an 80% chance it would earn the bonus for July tours. Rocky also guided customers for 15 days from July 16–July 31.

• On August 5 Rocky learned that it did not receive an average evaluation of “excellent” for its July tours, so it would not receive any bonus for July, and received all payment due for the July tours.

Rocky bases estimates of variable consideration on the most likely amount it expects to receive.

Required:

1. Prepare Rocky’s July 15 journal entry to record revenue for tours given from July 1–July 15.

2. Prepare Rocky’s July 31 journal entry to record revenue for tours given from July 16–July 31.

3. Prepare Rocky’s August 5 journal entry to record any necessary adjustments to revenue and receipt of payment from Wilderness.

Requirement 1

During the July 1 – July 15 period, Rocky estimates a less than 50% chance it will earn the bonus, so using the “most likely amount” approach, it assumes no bonus, and estimates its revenue as $1,000 per day × 10 days = $10,000

Accounts receivable 10,000

Service revenue ($1,000 × 10 days) 10,000

Requirement 2

During the...