Respond to the questions related to the following statements.

1. A wholly unperformed contract is one in which the company has neither transferred the promised goods or services to the customer nor received, or become entitled to receive, any consideration. Why are these contracts not recorded in the accounts?

2. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. Is this statement correct?

3. Elaina Company contracts with a customer and provides the customer with an option to purchase additional goods for free or at a discount. Should Elaina Company account for this option?

4. The transaction price is generally not adjusted to reflect the customer’s credit risk, meaning the risk that the customer will not pay the amount to which the entity is entitled to under the contract. Comment on this statement.

In business terms, a contract refers to an agreementenforceable by the law of a country.Further, an agreement must contain an offer, and another party should duly accept the same as a contract involvesat least two parties.

When both parties do not perform their part associated with a specific transaction, it is termed as awholly unperformed contract. In the given scenario, there is no exchange of goods, services, and money; therefore, it is not recorded as revenue in the books of the company.

The given statement is correct because revenues are recognized in the books of accounts when performance obligations are fully satisfied by business entities. Also, onStep 4: Recording of transaction by Elaina Company revenues can be calculated and recognized.

According to the given scenario, Elaina Company cannot record such transactions in the books of accounts because the company has offered an option to its customer. In addition, the same should not be recorded in the books until thecustomer avails such an offer.

The given statement is incorrect because it does not consider the credit risk when a business entity determines the transaction price. In other terms, thecalculations of credit risks do not affect the transaction price.