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Chapter 18: Question 7Q (page 1031)

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

Short Answer

Expert verified

In the revenue recognition process the contract is important as it helps recognize the obligations and amount they are receiving as a consideration.

Step by step solution

01

Definition of Contract in Revenue Recognition

Contract in revenue recognition is an agreement between the two parties which defines the financial payment or the terms related to the revenue received by the one party from another party.

02

Importance of contract in revenue recognition

  • In the revenue recognition process, the contract is important as it is an agreement between the parties, including terms and financial payments. It will be considered only when it is valid.
  • A contract is important as it includes the obligations for the company that they have to perform.
  • It is important as it includes the terms related to the revenue received and the financial payments.
  • Both the parties have to perform according to the contract only.
  • A contract stipulates both parties perform the obligation. If one party does not comply, the other party can file a case against the first party.

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Most popular questions from this chapter

On June 1, 2017, Mills Company sells \(200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2017, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that conditions for recognizing the sale as a bill-and-hold sale have been met) for Mills on June 1 and September 1, 2017. The cost of the shelving units to Mills is \)110,000.

Engelhart Implements Inc. sells tractors to area farmers. The price for each tractor includes a GPS positioning service for nine months (which facilitates field settings for planting and harvesting equipment). The GPS service is regularly sold on a standalone basis by Engelhart for a monthly fee. After nine months, the consumer can renew the service on a fee basis. Does Engelhart have one or multiple performance obligations? Explain.

Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, non-refundable fee of \(300 and a usage fee of \)5 per month. Students may renew the service for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?

When must multiple performance obligations in a revenue arrangement be accounted for separately?

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 –0–

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(a) Compute the amount of gross profit to be recognized each year, assuming the percentage-of-completion method is used.

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