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Chapter 18: Question 13Q (page 1031)

What are some examples of variable consideration? What are the two approaches for estimating variable consideration?

Short Answer

Expert verified

Discounts, credits, rebates, refunds, price concessions, and incentives are all examples of variable considerations. Whether officially specified in the contract or tacitly expressed, the transaction price incorporates such variable factors.

Step by step solution

01

Definition of Variable Consideration

Variable consideration is a wide term that can refer to various things, including price concessions, rebates, and reimbursements. Even though the quantity is constant, consideration is deemed variable if the amount an entity will get is dependent on a future event occurring or not occurring.

02

Examples and approaches for estimating variable consideration

Price or volume discounts, rebates, credits, performance incentives, or royalties are examples of variable consideration (where the price of an item or service is based on future events). To assess the amount of revenue to recognize, a firm estimates the amount of variable consideration it will get from the contract.

03

Two approaches for estimating variable consideration are

Companies estimate variable consideration using either (1)the anticipated value, which is a probability-weighted number, or (2) the most likely amount in a range of potential quantities. Companies choose between these two strategies based on which one anticipates the amount of attention they are entitled the best.

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Most popular questions from this chapter

(Sales with Returns) On March 10, 2017, Steele Company sold to Barr Hardware 200 tool sets at a price of \(50 each (cost \)30 per set) with terms of n/60, f.o.b. shipping point. Steele allows Barr to return any unused tool sets within 60 days of purchase. Steele estimates that (1) 10 sets will be returned, (2) the cost of recovering the products will be immaterial, and (3) the returned tools sets can be resold at a profit. On March 25, 2017, Barr returned six tool sets and received a credit to its account.

Instructions

(a) Prepare journal entries for Steele to record (1) the sale on March 10, 2017, (2) the return on March 25, 2017, and (c) any adjusting entries required on March 31, 2017 (when Steele prepares financial statements). Steele believes the original estimate of returns is correct.

(b) Indicate the income statement and balance sheet reporting by Steele at March 31, 2017, of the information related to the Barr sales transaction.

Frozen Delight, Inc. charges an initial franchise fee of \(75,000 for the right to operate as a franchisee of Frozen Delight. Of this amount, \)25,000 is collected immediately. The remainder is collected in four equal annual installments of \(12,500 each. These installments have a present value of \)41,402. As part of the total franchise fee, Frozen Delight also provides training (with a fair value of $2,000) to help franchisees get the store ready to open. The franchise agreement is signed on April 1, 2017, training is completed, and the store opens on July 1, 2017. Prepare the journal entries required by Frozen Delight in 2017.

(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.

Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers can purchase any combination of equipment, installation services, and training as part of Fuhremann’s security services. Thus, each of these performance obligations is separate from individual standalone selling prices. Laplante Inc. purchased cameras, installation, and training at a total price of \(80,000. Estimated standalone selling prices of the equipment, installation, and training are \)90,000, \(7,000, and \)3,000, respectively. How should the transaction price be allocated to the equipment, installation, and training?

What methods are used in practice to determine the extent of progress toward completion? Identify some “input measures” and some “output measures” that might be used to determine the extent of progress.
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