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Chapter 18: Question 9Q (page 1031)

What is a performance obligation? Under what conditions does a performance obligation exist?

Short Answer

Expert verified

The performance obligation is an obligation that sellers have to act according to the contract or promise made in a contract and provide products or services to the customers that benefit them.

Step by step solution

01

Meaning of Performance Obligation

Performance obligation refers to sellers' obligationto perform as per the contract and sell a product or provide services to the customers as promised in the contract. It can be explicit, implicit, or based on customary business practice.

02

Conditions under which performance obligation exists

  • To identify whether performance exists or not, the company can identify that the customer can benefit from the company's product or services.
  • Product or services provided by the company should be distinct from others to ensure the existence of performance obligation.
  • As the asset is generated or enhanced, the seller's performance produces or enhancesan asset controlled by the client.

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Most popular questions from this chapter

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

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.

Explain a bill-and-hold sale. When is revenue recognized in these situations?

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

On July 10, 2017, Amodt Music sold CDs to retailers on account and recorded sales revenue of \(700,000 (cost \)560,000). Amodt grants the right to return CDs that do not sell in 3 months following delivery. Past experience indicates that the normal return rate is 15%. By October 11, 2017, retailers returned CDs to Amodt and were granted credit of \(78,000. Prepare Amodt’s journal entries to record (a) the sale on July 10, 2017, and (b) \)78,000 of returns on October 11, 2017, and on October 31, 2017. Assume that Amodt prepares financial statement on October 31, 2017.
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