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Chapter 18: 3Q (page 1031)

Describe the revenue recognition principle.

Short Answer

Expert verified

The culmination of the process is the revenue recognition principle, which states that revenue is recognized when the performance obligation is satisfied.

Step by step solution

01

Overview of revenue recognition principle

Recognize revenue when each performance obligation is satisfied.

Example-Assume thatBoeing Corporationsigns a contract to sell aeroplanes toDelta Air Linesto recognize revenue.

Recognize revenue when each performance obligation is satisfied when Boeing recognizes revenue related to the sale of the Airplanes to Delta. At this point, Boeing delivers the aeroplanes to Delta and satisfies its performance obligation.

02

Explanation of principle

In essence, a change in control from Boeing to Delta occurs. Delta now controls the assets because it has the ability to direct the use of and obtain all the remaining benefits from the aeroplanes substantially. Control also includes

Delta has the ability to prevent other companies from directing the use of or receiving the benefits from the aeroplanes.

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Most popular questions from this chapter

Hillside Company enters into a contract with Sanchez Inc. to provide a software license and 3 years of customer support. The customer-support services require specialized knowledge that only Hillside Company’s employees can perform. How many performance obligations are in the contract?

On May 10, 2017, Cosmo Co. enters into a contract to deliver a product to Greig Inc. on June 15, 2017. Greig agrees to pay the full contract price of \(2,000 on July 15, 2017. The cost of the goods is \)1,300. Cosmo delivers the product to Greig on June 15, 2017, and receives payment on July 15, 2017. Prepare the journal entries for Cosmo related to this contract. Either party may terminate the contract without compensation until one of the parties performs

Explain a principal-agent relationship and its significance to revenue recognition.

Wood-Mode Company is involved in the design, manufacture, and installation of various types of wood products for large construction projects. Wood-Mode recently completed a large contract for Stadium Inc., which consisted of building 35 different types of concession counters for a new soccer arena under construction. The terms of the contract are that upon completion of the counters, Stadium would pay \(2,000,000. Unfortunately, due to the depressed economy, the completion of the new soccer arena is now delayed. Stadium has therefore asked Wood-Mode to hold the counters for 2 months at its manufacturing plant until the arena is completed. Stadium acknowledges in writing that it ordered the counters and that they now have ownership. The time that Wood-Mode Company must hold the counters is totally dependent on when the arena is completed. Because Wood-Mode has not received additional progress payments for the counters due to the delay, Stadium has provided a deposit of \)300,000.

Instructions

(a) Explain this type of revenue recognition transaction.

(b) What factors should be considered in determining when to recognize revenue in this transaction?

(c) Prepare the journal entry(ies) that Wood-Mode should make, assuming it signed a valid sales contract to sell the counters and received at the time the $300,000 deposit.

(Determine Transaction Price) Aaron’s Agency sells an insurance policy offered by Capital Insurance Company for a commission of \(100 on January 2, 2017. In addition, Aaron will receive an additional commission of \)10 each year for as long as the policyholder does not cancel the policy. After selling the policy, Aaron does not have any remaining performance obligations. Based on Aaron’s significant experience with these types of policies, it estimates that policyholders on average renew the policy for 4.5 years. It has no evidence to suggest that previous policyholder behavior will change.

Instructions

(a) Determine the transaction price of the arrangement for Aaron, assuming 100 policies are sold.

(b) Determine the revenue that Aaron will recognize in 2017.
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