Sound Sleeper Ltd. manufactures and sells mattresses to retailers across Canada. In 2020, Sound Sleeper signed a two-year contract with Zzz Ltd. to supply it with 40,000 mattresses at a price of $100 per unit. Sound Sleeper’s cost to manufacture a mattress is $25. Sound Sleeper provides Zzz with 30-day credit terms from the date of delivery. The following schedule summarizes the production, delivery, and payments in relation to the contract:

Required

a. Determine how much revenue Sound Sleeper would be able to recognize in 2020 and 2021. 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 Sound Sleeper allowed Zzz to return any mattresses that were returned by customers who found them uncomfortable? Based on experience, Sound Sleeper’s management estimated a return rate of 1% and that the mattresses being returned would be donated to local shelters.

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2020 2021 Total Mattresses delivered Manufacturing costs incurred Cash payments received 25,000 40,000 $1,000,000 15,000 $ 375,000 $1,400,000 $ 625,000 $2,450,000 $3,850,000