A Transaction Price for Multiple Performance Obligations Should be Allocated

1. A transaction price for multiple performance obligations should be allocated based on what the company could sell the goods for on a standalone basis. 2. Noncash consideration should be recognized on the basis of fair value of what is received. 3. The transaction price is the amount of consideration that a company expects to receive from a customer 4. Companies can use the expected value to estimate variable consideration when a company has a large number of contracts with similar characteristics. 5. Consignments are a specialized marketing method whereby the consignee takes possession of merchandise but title remains with manufacturer. 6. A contract liability is a company's obligations to transfer goods or services to a customer for which the company has received consideration from the customer. An example of a contract liability is Unearned magazine subscription. 7. 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. 8. The last step in the process for revenue recognition is to recognize revenue when each performance obligation is satisfied. 9. The first step in the process for revenue recognition is to identify the contract with customers. 10. When a company has an obligation or right to repurchase an asset for an amount greater than or equal to its selling price, the transaction should be treated as a financing transaction 11. When a customer purchases a product but is not yet ready for delivery, this is referred to as a bill-and-hold arrangement 12. If a contract involves a significant financing component, the time value of money is used to determine the fair value of the transaction. 13. Unconditional rights to receive consideration because a performance obligation has been satisfied are reported as a receivable on the balance sheet. 14. The role of the agent in a Principal-Agent relationship is to arrange for the principal to provide goods or services to a customer. 15. Revenue from a contract with a customer cannot be recognized until a contract exists. 16. 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 $110,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $100,000. The amount of revenue to be recognized on this transaction in 2018 is ($10,000 × 7/12) = $5,833./ smallest 17. Bella Pool Company sells prefabricated pools that cost $80,000 to customers for $144,000. The sales price includes an installation fee, which is valued at $20,000. The fair value of the pool is $128,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is ($128,000/$148,000) × $144,000 = $124,541. ($20,000/$148,000) × $144,000 = $19,459./ 2nd smallest 18. 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. 19. The fourth step in the process for revenue recognition is to allocate transaction price to the separate performance obligations 20. Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2018 with a performance bonus of $50,000 if the building is completed by July 31, 2018. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by July 31, 2018 Probability 65% August 7, 2018 August 14, 2018 25% 5% August 21, 2018 5% The transaction price for this transaction is $950,000 + ($50,000 × .65) + ($40,000 × .25) + ($30,000 × .05) + ($20,000 × .05) = $995,000 21. 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 $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation, and training are $90,000, $60,000, and $30,000 respectively. The transaction price allocated to equipment, installation and training is $72,000, $48,000 and $24,000 respectively. 22. 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. 23. When a customer is able to benefit from a good or service on its own or together with other readily available resources, the good or service Is distinct 24. The second step in the process for revenue recognition is to identify the separate performance obligations in the contract. 25. A performance obligation exists when a company provides a distinct product or service. 26. Partial satisfaction of a multiple performance obligation is reported on the balance sheet as contract asset. 27. On November 1, 2018, Green Valley Farm entered into a contract to buy a $150,000 harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2018. The harvester (cost of $110,000) was delivered on November 30, 2018. The journal entry to record the delivery of the equipment includes a debit to Unearned Sales Revenue for $150,000 28. On November 1, 2018, Green Valley Farm entered into a contract to buy a $150,000harvester from John Deere. The contract required Green Valley Farm to pay $150,000 in advance on November 1, 2018. The harvester (cost of $110,000) was delivered on November 30, 2018. The journal entry to record the contract on November 1, 2018 includes a credit to Unearned Sales Revenue for $150,000 29. On July 31, O'Malley Company contracted to have two products built by Taylor Manufacturing for a total of $370,000. The contract specifies that payment will only occur after both products have been transferred to O'Malley Company. Taylor determines that the standalone prices are $200,000 for Product 1 and $170,000 for Product 2. On August 1, when Product 1 has been transferred, Taylor's journal entry to record this event includes a debit to Contract Assets for $200,000. 30. P & G Auto Parts sells parts to AAA Car Repair during 2018. P&G offers rebates of 2% on purchases up to $60,000 and 3% on purchases above $60,000 if the customer's purchases for the year exceed $200,000. In the past, AAA normally purchases $300,000 in parts during a calendar year. On March 25, 2018, AAA Car Repair purchased $74,000 of parts. The journal entry to record the purchase includes a $74,000 – ($60,000 × .02) – ($14,000 × .03) = $72,380 / smallest 31. A contract between Boeing and Delta in which Boeing supplies planes to Delta is an agreement that creates enforceable rights and obligations for both parties. 32. 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 $144,000 on March 15, 2018. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2018 will include a credit to Unearned Service Revenue of $24,000. ($30,000/$180,000) × $144,000 = $24,000. 33. A contract is an agreement that creates enforceable rights and obligations. 34. Consideration paid or payable to customers reduces the consideration received and the revenue to be recognized.