1 Are the chairs and tables distinct products 2 Are the chairs distinct within

1 are the chairs and tables distinct products 2 are

This preview shows page 15 - 22 out of 62 pages.

1. Are the chairs and tables distinct products? 2. Are the chairs distinct within the contract? Yes Yes Each chair and each table is a distinct performance obligation.
Image of page 15

Subscribe to view the full document.

Tom’s Bistro sells cake as one of its menu items. The chef uses milk, eggs, flour, chocolate, and other ingredients to make the cake. How many performance obligations does Tom’s Bistro have when it sells a slice of cake? 1. Are the ingredients distinct products (i.e., can the the product or service can be sold separately from one another)? 2. Are the ingredients distinct within the contract? Yes No The cake is a single performance obligation. Tom’s Bistro
Image of page 16
Step 3: Determine the transaction price The transaction price is the amount that the company expects to collect from the customer in exchange for transferring goods or services. If it is not easily determined, then companies must consider followings: Variable consideration It arises when the price of a good or service is dependent on future events. Companies use either expected value or the most likely amount. Time value of money It arises when the contract involves a significant financing component. Non-cash consideration When non-cash consideration is included in the contract, revenue is generally recognized on the basis of the fair value of what is received. Other Consideration paid or payable to customers e.g., discounts
Image of page 17

Subscribe to view the full document.

Swan Corp & Knope Corp On July 4, 2018, Swan Corp sells 6 wood chairs and 1 wood table to Knope Corp on account. Swan Corp sells the chairs for $600 each and the table for $1,500. Knope promises to pay Swan Corp on August 1, 2018. Swan Corp has always collected its accounts from Knope Corp. Chairs Table 600 x 6 = 3,600 1,500 5,100
Image of page 18
Variable Consideration When transaction price is dependent upon future events This is likely to be an issue especially when the performance obligation is performed over time E.g., bonus on completion of a long-term construction contract How do we determine the transaction price in this case? Expected Value: probability weighted amount of revenue in a range of possible consideration amounts Most Likely Amount: the single most likely amount in a range of possible consideration outcomes
Image of page 19

Subscribe to view the full document.

Variable Consideration May only recognize variable consideration if both of the following conditions are met The company has experience with similar contracts and are able to estimate the cumulative amount of revenue Based on experience, it is highly probable that there will not be a significant reversal of revenue previously recognized
Image of page 20
Amazing Building Company On March 1, 2017, Amazing Building Company (AB) contracts with Karate Corp to build a new television studio for $500,000. The terms of the contract are as follows. AB gets a bonus of $50,000 if it finishes on time AB loses 25% of the performance bonus for every month beyond the agreed upon finish date AB estimates that it is only 50% likely that the studio will be finished on time, 30% likely
Image of page 21

Subscribe to view the full document.

Image of page 22
  • Winter '18
  • jane smith

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes