Ch. 17 and 18

When multiple performance obligations exist in a contract, they should be accounted for as a single performance obligation when

each service is interdependent and interrelated

On June 1, 2018, Johnson & Sons sold equipment to James Landscaping Service in exchange for a zero-interest bearing note with a face value of $110000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100000. The amount of revenue to be recognized on this transaction in 2018 is

$100000 sales revenue and $5833 interest revenue.

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144000 on March 15, 2018. Estimated standalone fair values of the equipment, installation, and training are $90000, $60000, and $30000 respectively. The transaction price allocated to equipment, installation and training is

$72000, $48000, $24000 respectively.

Which of the following is an indicator that the customer has obtained control of the good or service?

The seller has transferred physical possession of the asset to the customer, The customer has significant risks and rewards of ownership, The customer has accepted the asset.

Chelsea sells equipment to a customer. The total selling price includes installation and training services. Companies other than Chelsea also provide installation and training services, but the customer has chosen to have Chelsea perform these tasks. What is (are) Chelsea's performance obligation(s)?

Three separate performance obligations: the sale of the equipment, the sale of its installation and the sale of training services.

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing the software, the company also provides consulting services and support to ensure smooth operation of the software. The total transaction price is $420,000. Based on standalone values, the company estimates the consulting services and support have a value of $120,000 and the software license has a value of $300,000. Assuming the performance obligations are not interdependent, the journal entry to record the transaction includes

a credit to Sales Revenue for $300,000 and a credit to Unearned Service Revenue of $120,000

The new standard, Revenue from Contracts with Customers,

adopts an asset-liability approach for revenue recognition.

A transaction price for multiple performance obligations should be allocated

based on what the company could sell the goods for on a standalone basis.

revenue from a contract with a customer

cannot be recognized until a contract exists.

One criteria that indicates that a company should disregard revenue guidance for contracts is when

each party can unilaterally terminate the contract without compensation.

the second step in the process for revenue recognition is to

identify the separate performance obligations in the contract

a contract

is an agreement that creates enforceable rights and obligations

a contract between Boeing and Delta in which Boeing supplied planes to Delta

is an agreement that creates enforceable rights and obligations for both parties

the transaction price

is the amount of consideration that a company expects to receive from a customer

Noncash consideration should be

recognized on the basis of fair value of what is received.

The converged standard on revenue recognition

recognizes and measures revenue based on changes in assets and liabilities

On January 15, 2018, Bella Vista Company enters into a contract to build custom equipment for ABC Carpet Company. The contract specified a delivery date of March 1. The equipment was not delivered until March 31. The contract required full payment of $75,000 30 days after delivery. The revenue for this contract should be

recorded on March 31, 2018

Consideration paid or payable to customers

reduces the consideration received and the revenue to be recognized.

Which method of measuring the fair value of a performance obligation is dependent on the standalone selling prices of other goods or services promised in the contract?

residual value.

In determining the transaction price, the company must consider:

variable consideration, non-cash consideration, time value of money, and consideration payable.

The following information is available about a signed agreement between two entities: • The entities have agreed to specific performance obligations. • The entities have agreed on a price related to the performance obligations. • No work has begun on the performance obligations and the contract is cancelable without payment of penalty or other consideration. • It is probable that the company completing the work will collect the agreed upon consideration. Does a contract exist between the entities to which the revenue recognition criteria may be applied?

A contract to which the revenue recognition criteria applies does not exist because it is cancelable without penalty and no work on the performance obligations has begun.

Festi Corp. is evaluating if revenue may be recognized for two of their contracts. The customer in Contract A has indicated that they are ready to accept the transfer of the products associated with the contract, but delivery has not yet occurred. The customer in Contract B has received legal title to the products, but has asked Festi to store the products for them until they open the new stores for which the product has been ordered. Festi has clearly labeled and set aside the products in the warehouse for the customer in Contract B, but delivery has not yet occurred. Should revenue be recognized for: Contract A? Contract B?

No; Yes

The revenue recognition standard, Revenue from Contracts with Customers, states a specific approach should be used by companies to recognize revenue. The standard:

Requires an asset-liability approach because an asset or a liability may stem from the terms of the contract and measuring the change in the asset or liability over the life of the contract results in a disciplined approach to measuring and recognizing revenue.

to address inconsistencies and weakness in revenue recognition, a comprehensive revenue recognition standard was developed entitled the

Revenue from Contracts with Customers

Improper revenue recognition is the most common form of fraudulent financial reporting and is the most prevalent reason for accounting restatements for all of the following reasons except:

Revenue recognition is not prone to error because of management's focus on proper revenue recognition.

Companies can use the expected value to estimate variable consideration when

a company has a large number of contracts with similar characteristics.

a performance obligation exists when

a company provides a distinct product or service

An indication that the customer has taken control of the good or service is that

the selling company has transferred legal title to the asset.

If a contract involves a significant financing component,

the time value of money is used to determine the fair value of the transaction.