Step 5: Recognize Revenue When (or As) the Entity Satisfies a Performance Obligation

The final step in the revenue process deals with the timing of revenue recognitionthat is, when

can revenue be recognized.

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 cus-

tomer. 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 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 . . .

>> 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 . . .

Questions

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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