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Chapter 18: Question 6Q (page 1031)

When is revenue recognized in the following situations? (a) Revenue from selling products, (b) revenue from services performed, (c) revenue from permitting others to use company assets, and (d) revenue from disposing of assets other than products.

Short Answer

Expert verified
  1. When the seller has transferred the ownership of the product to the buyer
  2. When services have been performed by the company
  3. When interest, rent, etc., are received in return for assets used by others.
  4. At the date of sale, revenue is recognized.

Step by step solution

01

Definition of Revenue Recognition

According to the revenue recognition principle, revenue is recognized when goods are exchanged for some consideration (amount) or when services are performed and receive some amount/cash in return.

02

Revenue recognized in the following situations

According to the revenue recognition concept, revenue is recognized in the following situations as follows:

  1. Revenue from selling products: Under this situation, revenue is recognized when the seller transfers the ownership rights of the product to the buyer. When the seller sells the product to the buyer and receives a considerable amount in return.
  2. Revenue from services performed: Under this situation, revenue is recognized when services are rendered to the customer or services performed and receive some considerable amount in return.
  3. Revenue from permitting others to use company assets: Under this situation, revenue is recognized when the company receives some amount as rent, royalty fee, interest, etc.,from others to use the company鈥檚 assets.
  4. Revenue from disposing of assets other than products: Under this situation, revenue is recognized at the time or the date of sale of the assets.

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Most popular questions from this chapter

What qualitative and quantitative disclosures are required related to revenue recognition?

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

What are the reporting issues in a sale with a repurchase agreement?

In September 2017, Gaertner Corp. commits to selling 150 of its iPhone-compatible docking stations to Better Buy Co. for \(15,000 (\)100 per product). The stations are delivered to Better Buy over the next 6 months. After 90 stations are delivered, the contract is modified and Gaertner promises to deliver an additional 45 products for an additional \(4,275 (\)95 per station). All sales are cash on delivery.

Instructions

(b) Prepare the journal entry for the sale of 10 more stations after the contract modification, assuming that the price for the additional stations reflects the standalone selling price at the time of the contract modification. In addition, the additional stations are distinct from the original products as Gaertner regularly sells the products separately.

Explain the reporting for (a) costs to fulfill a contract and (b) collectibility.
See all solutions

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