(Revenue Recognition-Point of Sale)
Wilbur Company is involved in the design, manufacture, and installation of various types of products for large equestrain projects. Wilbur recently completed a large contract for Mr. Ed Inc., which consisted of building 78 different types of jumping fences for a new equestrain arena under construction. The terms of the contract are that upon completion and installation of the fences, Mr. Ed would pay $3,000,000. Unfortunately, due to the depressed economy, the completion of the new equestrain arena is now delayed. Mr. Ed has therefore asked Wilbur to hold the fences at its manufacturing plant until the arena is completed. Mr. Ed acknowledges in writing that it ordered the fences and that they now have ownership. The time that Wilbur Company must hold the fences is totally dependent on when the arena is completed. Because Wilbur has not received additional progress payments for the arena due to the delay, Mr. Ed has provided a deposit of $400,000.
Instructions
(a) Explain this type of revenue recognition transaction.
(b) What factors should be considered in determining when to recognize revenue in this transaction?
(c) Prepare the journal entry(ies) that Wilbur should make, assuming it signed a valid sales contract to sell the fences and received at the time of sale the $400,000 payment.