Lotus Consulting entered into a contract with Ribbon Financial for cost reduction over a period of six months on January 1. Lotus will receive an amount of $24,800 from Ribbon at the end of each month. Lotus will receive an additional amount of $12,400 from Ribbon Financial if total cost saving reaches a specific target, but Lotus will be obligated to refund $12,400 to Ribbon if total cost saving falls short. According to an estimate made by Lotus, there is an 80% chance that cost savings will reach the target and it calculates the contract price based on the expected value of future payments to be received.
Requirement: Prepare following journal entries for Lotus.
1. Prepare the journal entry on January 31 to record the collection of cash and recognition of the first month’s revenue,
2. Record the entry on June 30 for receipt of the bonus, assuming total cost savings exceed target.
3. Record the entry on June 30 for payment of the penalty, assuming total cost savings fall short of target.
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