Case B

On 1/2/20X1, Entity P, a manufacturer, sells equipment to a customer for consideration equal to 5% of the customers future net sales for the next one year.

The entity has determined that the transaction meets the criterion in Step 1 to be accounted for as a contract with a customer. Control of the equipment transfers to the customer on the date of sale (1/2/20X1).

Based on the customers audited financial statements, the customers sales for the last ten years have fluctuated from $1.4 million to $2.2 million with the probability weighted average amount being $2.0 million.

Entity P is highly confident that the customers sales will not be less than $1.6 million in the next one year.

How much revenue should the entity recognize upon transferring control of the equipment to the customer? Explain. Tip: See ASC 606-10-32-11. Also prepare a journal entry for this transaction.