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Chapter 18: Q20Q. (page 1031)

When does a company satisfy a performance obligation? Identify the indicators of satisfaction of a performance obligation.

Short Answer

Expert verified

Performance obligations get satisfied when the company physically transfers assets to the customers.

Step by step solution

01

Definition of Performance Obligation

The term performance obligation refers to the seller's obligation to fulfill the terms of the contract and to sell or supply services to consumers as promised. It may be stated explicitly, indirectly, or based onstandard business practice.

02

Indicators of satisfaction of a performance obligation

When the customer receives the right to the goods or services, the firm has fulfilled its performance obligation. The following are signs that the customer has regained control:

1. The corporation has a claim to theasset's payment.

2. The firm transferred the asset's legal title.

3. The corporation physically transferred the asset.

4. The client bears all of the risks and benefits of ownership.

5. The customer has accepted the asset.

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Most popular questions from this chapter

Explain the importance of a contract in the revenue recognition process.

On what basis should the transaction price be allocated to various performance obligations? Identify the approaches for allocating the transaction price.

Guillen, Inc. began work on a \(7,000,000 contract in 2017 to construct an office building. Guillen uses the completed-contract method. At December 31, 2017, the balances in certain accounts were Construction in Process \)1,715,000, Accounts Receivable \(240,000, and Billings on Construction in Process \)1,000,000. Indicate how these accounts would be reported in Guillen’s December 31, 2017, balance sheet.

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What are the two basic methods of accounting for long-term construction contracts? Indicate the circumstances that determine when one or the other of these methods should be used.
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