DC Systems Ltd. manufactures and sells security screening systems to government agencies across North America. The company’s parcel and small cargo X-ray systems are used to inspect freight and small cargo at customs facilities. In 2024, DC signed a two-year contract with NCC, a Canadian Crown corporation, to supply it with 100 vehicles at a price of $50,000 per vehicle. DC’s cost to manufacture each vehicle is $28,500. The following schedule summarizes the production, delivery, and payments in relation to the contract. Production costs are recorded to inventory:

Required 

a. Determine how much revenue DC Systems would be able to recognize in 2024 and 2025. Use the five-step model for revenue recognition in preparing your response. 

b. Prepare the required summary journal entries for the contract based on your analysis in part (a). 

c. How would your answer to part (a) change if DC allowed NCC to return any systems that were defective? Based on past experience, DC’s management estimated a return rate of 1% and that the systems being returned would need to be scrapped.

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Systems delivered Production costs incurred Cash payments received 2024 80 $2,280,000 $3,200,000 2025 20 $570,000 $1,500,000 Total 100 $2,850,000 $4,700,000