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Chapter 18: Q26Q. (page 1031)

Explain a principal-agent relationship and its significance to revenue recognition.

Short Answer

Expert verified

The principal-agent relationship states that the principal's performance role is to deliver goods or provide services for the customer.

Step by step solution

01

Meaning of Principal-Agent Relationship

A principal-agent relationship is one entity appoints another to operate on its behalf legally. The agent acts on behalf of the principle in a principal-agent relationship and should not have a conflict of interest in carrying out the act.

02

Principal-agent relationship and its significance

In a principal-agent relationship, the principal's performance responsibility is to supply products or execute services for a client. The agent's performance responsibility is to have the principal arrange to deliver these products or services to a client. In a principal-agent relationship, the amount collected by the agent on behalf of the principal is not considered revenue. The amount of commission received by the agent is its income (usually a percentage of the sales price or total revenue).

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Most popular questions from this chapter

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(b) Shaw prepares an income statement for the first quarter of 2017, ending on March 31, 2017 (installation was completed on June 18, 2017). How much revenue should Shaw recognize related to its sale to Ricard?

When does a company satisfy a performance obligation? Identify the indicators of satisfaction of a performance obligation.

(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.

Instructions

(a) Determine the transaction price of the arrangement for Blair Biotech.

(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.

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.

What are the two types of losses that can become evident in accounting for long-term contracts? What is the nature of each type of loss? How is each type accounted for?
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