On May 10, 2020, Windsor Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2020. Greig agrees to pay the full contract price of $1,810 on July 15, 2020. The cost of the goods is $1,050. Windsor delivers the product to Greig on June 15, 2020, and receives payment on July 15, 2020. Prepare the journal entries for Windsor related to this contract. Either party may terminate the contract without compensation until one of the parties performs.

Question

Business

Branden Hahn

25 November, 06:23

On May 10, 2020, Windsor Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2020. Greig agrees to pay the full contract price of $1,810 on July 15, 2020. The cost of the goods is $1,050. Windsor delivers the product to Greig on June 15, 2020, and receives payment on July 15, 2020. Prepare the journal entries for Windsor related to this contract. Either party may terminate the contract without compensation until one of the parties performs.

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Marques Huffman · Answer 1

On June 15

Debit Accounts receivable $1,810

Credit Revenue account $1,810

Being entries to recognize revenue earned

Debit Cost of sale $1,050

Credit Inventory $1,050

Being entries to record cost of item sold

When cash is received on July 15,

Debit Cash account $1,810

Credit Accounts receivable $1,810

Being entries to record cash received

Explanation:

The sale of an item of inventory has a dual effect on a company's books. These effects are the recognition of sales revenue and cost of sales.

Revenue is only earned and recognized when the item agreed has been delivered.

Hence, on June 15 after the delivery of the product, revenue is recognized by Windsor even though cash is not received. Cash receipt is recorded on July 15.

When revenue is earned but cash is yet to be received,

Debit Accounts receivable

Credit Revenue account

When cash is received,

Debit Cash account

Credit Accounts receivable.