Santa's Holiday Farm sells and delivers fir trees over the holiday season. The trees sell for $50 each and the farm also offers a removal service after the holiday season for $20. The trees cost $15 each. In November and December 2017, the farm offers customers a holiday package that costs $60 and includes both a fir tree and removal service. The trees will be removed on January 3, 2018. On December 2, 2017, Santa's Holiday Farm sells 200 holiday packages which are all delivered on the same day.
Instructions
(a) Using the five-step model for revenue recognition under the contract-based approach, answer the following questions related to the holiday packages sold by Santa's Holiday Farm:
1. Is there a contract? If so, describe the contract.
2. What is Santa's Holiday Farm's performance obligation(s)?
3. What is the transaction price?
4. Is there a need to allocate the transaction price?
5. Has the performance obligation(s) been satisfied? If so, when?
(b) Prepare any journal entries required to record revenue. (Round to the nearest dollar.)
TAKING IT FURTHER
Stephen Forni is the manager of Santa's Holiday Farm. He has found the use of the contract-based approach to revenue recognition very challenging and does not understand why he cannot go back to the old way of doing it. Explain to Stephen why accounting standards change over time