Casale Products Corporation manufactures and resurfaces bowling pins for commercial and residential use. On January 2 of the current year, Casale signs a contract with Closmeyer Lanes to be the exclusive supplier of pins for its lanes located throughout the United States. Casale initially agreed to deliver 300,000 pins at a price of $15 each (i.e., total revenue $4,500,000). Casale’s cost of sales is $10 per pin. Delivery of the pins is scheduled for December 31. Under the terms of the agreement, Casale will also provide pin refurbishing services (free of charge) that includes recoating the pins as requested by Closmeyer. Pin refurbishment contracts are provided by Casale to other customers for an annual fee of $300,000. Casale offers volume discounts to its customers.
For purposes of this contract, volume discounts will be granted to Closmeyer if total sales to the lanes exceed specified amounts. The discount is related to the total sales and services provided. The volume discount schedule for this contract, which includes the expected probability for each sales level, follows
Sales Level Volume Discount Offered Probability of Reaching the Specified Sales Level $4,500,000 0% 10% $7,000,000 5% 60% $10,000,000 8% 30%
The sales volume discount offer is retroactive in that if a sales level is reached, the refund for the discount is applied to previous sales.
Required: Perform the five steps in the revenue recognition process, assuming that Casale uses the expected value approach to determine the transaction price and the residual approach to allocate that transaction price. Provide all necessary journal entries to record revenue for the current year.
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