Each of the following independent situations relates to the recognition of revenue:
a. On June 2, 2017, a customer books travel on an airline, paying $ 500 for a round trip ticket that departs July 15, 2017, and returns July 20, 2017. In addition, once the round trip ticket is used, the airline credits the passenger’s frequent flier account for 500 miles. The airline determines that each frequent flier point has a value of $ 0.01.
b. On May 1, 2017, a retailer enters into a contract with a construction company. The construction company will build a new warehouse for the retailer at a price of $ 2 million. The retailer will make four equal payments to the construction company over the 1 year construction period, starting on May 1, 2017, and then every 4 months. The retailer can cancel construction at any time and will own any construction to date; however, it must pay the construction company for work done up to the cancellation date. The building is completed on April 30, 2017.
c. Morning Donut agrees to supply donuts and coffee on a daily basis to a local business. The contract starts on January 1, 2017, and runs for 1 year. Morning Donut charges $ 400 per week for the donuts and coffee.
d. The Raleigh Knights sell four season tickets to a customer. The Knights play 10 regular season games, and the cost of one season ticket is $ 250.
Required:
For each situation, use the 5 step process to determine when revenue can be recognized. Determine
(1) If a contract exists,
(2) The performance obligations in the contract,
(3) The transaction price in the contract,
(4) How the transaction price is allocated to the performance obligations,
(5) When revenue is recognized.