Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

25-25 Pending Content: Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1 Goods and services are assets, even if only momentarily,

25-25

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

a. Using the asset to produce goods or provide services (including public services)

b. Using the asset to enhance the value of other assets

c. Using the asset to settle liabilities or reduce expenses

d. Selling or exchanging the asset

e. Pledging the asset to secure a loan

f. Holding the asset.

25-26

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset (see paragraphs 606-10-55-66 through 55-78).

>> Performance Obligations Satisfied Over Time

25-27

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:

a. The customer simultaneously receives and consumes the benefits provided by the entitys performance as the entity performs (see paragraphs 606-10-55-5 through 55-6).

b. The entitys performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7).

c. The entitys performance does not create an asset with an alternative use to the entity (see paragraph 606-10-25-28), and the entity has an enforceable right to payment for performance completed to date (see paragraph 606-10-25-29).

25-28

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

An asset created by an entitys performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. Paragraphs 606-10-55-8 through 55-10 provide guidance for assessing whether an asset has an alternative use to an entity.

25-29

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 606-10-25-27(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entitys failure to perform as promised. Paragraphs 606-10-55-11 through 55-15 provide guidance for assessing the existence and enforceability of a right to payment and whether an entitys right to payment would entitle the entity to be paid for its performance completed to date.

>> Performance Obligations Satisfied at a Point in Time

25-30

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

If a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, the entity shall consider the guidance on control in paragraphs 606-10-25-23 through 25-26. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:

a. The entity has a present right to payment for the assetIf a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange.

b. The customer has legal title to the assetLegal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customers failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset.

c. The entity has transferred physical possession of the assetThe customers physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill-and-hold arrangements, the entity may have physical possession of an asset that the customer controls. Paragraphs 606-10-55-66 through 55-78, 606-10-55-79 through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively.

d. The customer has the significant risks and rewards of ownership of the assetThe transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset.

e. The customer has accepted the assetThe customers acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acceptance clause on when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-55-85 through 55-88.

32-14

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

At the end of each reporting period, an entity shall update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. The entity shall account for changes in the transaction price in accordance with paragraphs 606-10-32-42 through 32-45.

32-42

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services.

32-43

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

An entity shall allocate to the performance obligations in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in standalone selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes.

55-248

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on January 1, 20X1, and work begins immediately. The entity concludes that the service is a single performance obligation in accordance with paragraph 606-10-25-14(b). This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progressthat is, a time-based measure of progress).

55-249

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service.

55-250

Pending Content:

Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1

The entity measures its progress toward complete satisfaction of the performance obligation as each week of service is complete. To determine the transaction price (and the amount of revenue to be recognized), the entity measures the fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any subsequent changes in the fair value of the shares received (or receivable) in revenue.

EYE SPY sells sophisticated video surveillance equipment. EYE SPY sells the equipment and computer integration services together. It does not sell these separately. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors could theoretically provide computer integration services. Historically, EYE SPY has not sold maintenance services.

The sales manager for EYE SPY has just obtained a signed contract from Secret Manufacturing (SM) to provide and perform computer integration services for surveillance equipment at a cost of $10 million, and have everything operational within one year, at which time full payment is due. SM will not get control of the video surveillance equipment until the integration is completed and EYE SPY turns control of the system over to SM. Management expects to be able to have the system fully operational and available for use by SM in the 12th month of the contract.

EYE SPY believes this system would also be valuable to SMs competitors. The contract price of $10 million includes a five-year maintenance agreement that will commence after the installation is completed. SM has a great credit rating and always pays its bills. EYE SPYs sales manager is very pleased because he will receive a 2% bonus based on the gross sales contract price, and it is payable upon receipt of a signed contract.

EYE SPY maintains a marketing group to work on contract proposals. The total annual salaries for the marketing group are $400,000. On average, the marketing group works on 20 proposals each year. This contract is expected to have a 15% to 20% margin.

Part IV:

Part III should be completed before beginning Part IV.

Background:

At the end of 11 months, the system is fully operational. The system has been tested and accepted by SM. The old surveillance equipment was decommissioned when the new system was installed. The old equipment was shipped to EYE SPY in month 11. The old surveillance equipment was sold the next month for $120,000. For the sake of simplicity, no financing component needs to be allocated to the maintenance contract.

Requirements:

Review ASC 606-25-27 through 30; ASC 606-10-32-14, 42 and 43; and also ASC 606-55-248-250.

Perform step five of the revenue recognition model and recognized revenue as performance obligations are satisfied. By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Record any required journal entries for revenue, deferred costs, etc., through the 11th and 12th months of the contract. Prepare any required, updated T accounts.

Note: While some journal entries may have been recorded monthly, for purposes of this case, show the cumulative journal entry recorded through the 11th and 12th months. Show all calculations.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Estimating

Authors: Rodney D. Stewart

2nd Edition

0471857076, 978-0471857075

More Books

Students also viewed these Accounting questions

Question

2. Use the working-backward strategy to plan a party.

Answered: 1 week ago