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P11.7A (LO 4)

On April 2, 2021, Pharma Company entered into a contract tosupply medication to Laxall Drug Stores, FOB shipping point, terms2/30, n/45. The selling price of the medication is $40,000 and themedication cost Pharma Company $25,000. Pharma has a stated returnpolicy that goods may be returned within 30 days. The medicationwas shipped on April 10, 2021. Pharma's management estimatesreturns using the expected value method and sales discounts areestimated using the most likely outcome. Based on past experiencewith this product, returns are 5% of sales 50% of the time, 10% ofsales 20% of the time, and 20% of sales 30% of the time. LaxallDrug Stores will most likely pay within the discount period. PharmaCompany uses the contract-based approach for revenuerecognition.

Instructions

a. Describe the rights and obligations of each party in thecontract between Pharma Company and Laxall Drug Stores.

b. Identify the variable consideration in the contract.

c. Calculate the transaction price. (Round all amounts to thenearest dollar.)

d. Prepare journal entries to recognize revenue on theappropriate date. (Hint: The expected value method is also used todetermine the amount for cost of goods sold and estimated inventoryreturns.)