Cuppa Joe: Applying the Five-Step Revenue Model

Facts: Cuppa Joe, a coffeehouse chain, sells beverages and premium homemade foods. The

Company offers a popular loyalty program whereby customers can purchase 10 cups of coffee

and get the 11th cup free. Customers must present their punch card with every purchase to

earn punches toward a free cup. Cuppa Joe is a nonpublic company and has asked for your help

applying the five-step revenue model to its customer sales.

Research Question: Assume a customer purchases a latte for $4.50 ($4.85 with tax) and

presents his loyalty punch card, earning a punch toward a free medium cup of coffee. How

should Cuppa Joe record revenue for this transaction under ASC 606?

10. For each performance obligation identified by Cuppa Joe, when should Cuppa Joe recognize

revenue? Is "point in time" or "over time" recognition appropriate?

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11. What entry should Cuppa Joe record at the transaction date?

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Notes:

25-23 An entity shall recognize revenue when (or as) the entity satisfies a performance

obligation by transferring a promised good or service (that is, an asset) to a customer.

An asset is transferred when (or as) the customer obtains control of that asset.

25-24 For each performance obligation identified in accordance with paragraphs 606-10-25-

14 through 25-22, an entity shall determine at contract inception whether it satisfies

the performance obligation over time (in accordance with paragraphs 606-10-25-27

through 25-29) or satisfies the performance obligation at a point in time (in accordance

with paragraph 606-10-25-30). If an entity does not satisfy a performance obligation

over time, the performance obligation is satisfied at a point in time.

>> Performance Obligations Satisfied Over Time

25-27 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 entity's performance as the entity performs . . .

b. The entity's performance creates or enhances an asset (for example, work in

process) that the customer controls as the asset is created or enhanced . . .

c. The entity's performance does not design 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 . . .

>> Performance Obligations Satisfied At a Point in Time

25-30 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 asset . . .

b. The customer has legal title to the asset . . .

c. The entity has transferred physical possession of the asset . . .

d. The customer has the significant risks and rewards of ownership of the asset . . .

e. The customer has accepted the asset . . .