Question
Friendly Farms offers a variety of food (fresh meats and produce) as well as kitchen/menu support to its customers. Rebeccas Restaurant, a customer, approaches Friendly
Friendly Farms offers a variety of food (fresh meats and produce) as well as kitchen/menu support to its customers. Rebeccas Restaurant, a customer, approaches Friendly Farms with the hopes of reinventing its image and creating a farm to table reputation. Friendly Farms offers the following to Rebecca:
Friendly Farms will (1) deliver a defined amount of meat and vegetables, (2) provide a menu-planning consulting service for 1 year, and finally, (3) give Rebecca access to a 24/7 call support center for 1 year (to assist the kitchen in making farm to table dishes). When Friendly Farms sells these separately to customers, Friendly charges $50,000 for the meat and vegetables, $35,000 for the consulting service, and $15,000 for the call center access. The food, consulting service and call center access function independently of the others and can be sold separately.
Friendly Farms is offering Rebecca all aforementioned items together for a contract price of $80,000. Payment terms are 50 percent consideration due at contract signing, with the remaining 50 percent due over the contract year.
Rebecca has a verbal agreement with Friendly that is based on Friendlys unsigned quote to Rebecca on November 30, 2022, for the meat and vegetables, the consulting service, and the call center access for total consideration of $80,000 and payment terms noted above. The agreement creates enforceable rights and obligations pursuant to Friendlys customary business practices. None of these items can be redirected by Friendly to another customer. Friendly performed a credit check on Rebecca and has determined that Rebecca has the intention and ability to pay Rebecca for fulfilling its portion of the contract. Rebecca is required to pay Friendly for performance completed to date if Rebecca cancels the contract with Friendly for reasons other than Friendlys failure to perform under the contract as promised. Rebecca makes a payment on November 30, 2022, in the amount of $40,000 (50% of total consideration of $80K) pursuant to the agreement. Upholding the contract, Friendly Farms delivers the agreed-upon amount of meats and vegetables to Rebecca on the date of the quote and starts to provide access to the menu-planning consulting service and call center.
Required
Friendly Farms CFO is trying to understand the new revenue recognition model and has asked you to explain how Friendly would account for the above scenario under the new standard. In order to help Friendlys CFO, you will need to research the new accounting standard using the FASB Codification. Here are instructions for doing so: Go to the website (http://asc.fasb.org).
Question 1: As you consider how Friendly would account for the above scenario under the new revenue recognition model, please start your research in the FASB Codification at ASC606-10-05-4. Find the 5 steps to revenue recognition and provide a summary of each of the steps.
Question 2: provide an assessment of whether a contract exists between Friendly and Rebecca, utilizing FASB guidance.
Question 3: identify the performance obligations set forth in the contract. For each one, explain why it qualifies as a performance obligation according to the FASB guidance.
Question 4: Finally, how would Friendly allocate the transaction price to the performance obligations you identified in #3, according to FASB guidance? (Please provide computational support for your allocation of the transaction price to the specific performance obligations included in the contract.)
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