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Chapter 18: Q18-2E (page 1034)

Respond to the questions related to the following statements.

1. A wholly unperformed contract is one in which the company has neither transferred the promised goods or services to the customer nor received, or become entitled to receive, any consideration. Why are these contracts not recorded in the accounts?

2. Performance obligations are the unit of account for purposes of applying the revenue recognition standard and therefore determine when and how revenue is recognized. Is this statement correct?

3. Elaina Company contracts with a customer and provides the customer with an option to purchase additional goods for free or at a discount. Should Elaina Company account for this option?

4. The transaction price is generally not adjusted to reflect the customer鈥檚 credit risk, meaning the risk that the customer will not pay the amount to which the entity is entitled to under the contract. Comment on this statement.

Short Answer

Expert verified

Answer

According to the given scenarios, the transactions and events should be reported in the books of accounts according to the statedrules, standards, and associated principles.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of Contract  

In business terms, a contract refers to an agreementenforceable by the law of a country.Further, an agreement must contain an offer, and another party should duly accept the same as a contract involvesat least two parties.

02

Treatment of wholly unperformed contract

When both parties do not perform their part associated with a specific transaction, it is termed as awholly unperformed contract. In the given scenario, there is no exchange of goods, services, and money; therefore, it is not recorded as revenue in the books of the company.

03

Comment on performance obligations

The given statement is correct because revenues are recognized in the books of accounts when performance obligations are fully satisfied by business entities. Also, onStep 4: Recording of transaction by Elaina Company revenues can be calculated and recognized.

04

Recording of transaction by Elaina Company

According to the given scenario, Elaina Company cannot record such transactions in the books of accounts because the company has offered an option to its customer. In addition, the same should not be recorded in the books until thecustomer avails such an offer.

05

Comment on credit risk

The given statement is incorrect because it does not consider the credit risk when a business entity determines the transaction price. In other terms, thecalculations of credit risks do not affect the transaction price.

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Most popular questions from this chapter

Jansen Corporation shipped \(20,000 of merchandise on consignment to Gooch Company. Jansen paid freight costs of \)2,000. Gooch Company paid \(500 for local advertising, which is reimbursable from Jansen. By year-end, 60% of the merchandise had been sold for \)21,500. Gooch notified Jansen, retained a 10% commission, and remitted the cash due to Jansen. Prepare Jansen鈥檚 journal entry when the cash is received.

Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, non-refundable fee of \(300 and a usage fee of \)5 per month. Students may renew the service for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?

What is the nature of a sale on consignment?

Uddin Publishing Co. publishes college textbooks that are sold to bookstores on the following terms. Each title has a fixed wholesale price, terms f.o.b. shipping point, and payment is due 60 days after shipment. The retailer may return a maximum of 30% of an order at the retailer鈥檚 expense. Sales are made only to retailers who have good credit ratings. Past experience indicates that the normal return rate is 12%. The costs of recovery are expected to be immaterial, and the textbooks are expected to be resold at a profit.

Instructions

(a) Identify the revenue recognition criteria that Uddin could employ concerning textbook sales.

(b) Briefly discuss the reasoning for your answers in (a) above.

(c) On July 1, 2017, Uddin shipped books invoiced at \(15,000,000 (cost \)12,000,000). Prepare the journal entry to record this transaction.

(d) On October 3, 2017, \(1.5 million of the invoiced July sales were returned according to the return policy, and the remaining \)13.5 million was paid. Prepare the journal entries for the return and payment.

(e) Assume Uddin prepares financial statements on October 31, 2017, the close of the fiscal year. No other returns are anticipated. Indicate the amounts reported on the income statement and balance related to the above transactions.

How do companies recognize revenue from a performance obligation over time?
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