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Chapter 18: Question 7Q (page 1031)

Explain the importance of a contract in the revenue recognition process.

Short Answer

Expert verified

In the revenue recognition process the contract is important as it helps recognize the obligations and amount they are receiving as a consideration.

Step by step solution

01

Definition of Contract in Revenue Recognition

Contract in revenue recognition is an agreement between the two parties which defines the financial payment or the terms related to the revenue received by the one party from another party.

02

Importance of contract in revenue recognition

  • In the revenue recognition process, the contract is important as it is an agreement between the parties, including terms and financial payments. It will be considered only when it is valid.
  • A contract is important as it includes the obligations for the company that they have to perform.
  • It is important as it includes the terms related to the revenue received and the financial payments.
  • Both the parties have to perform according to the contract only.
  • A contract stipulates both parties perform the obligation. If one party does not comply, the other party can file a case against the first party.

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Most popular questions from this chapter

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?

(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 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?

Explain the accounting for sales with the right of return.

What methods are used in practice to determine the extent of progress toward completion? Identify some 鈥渋nput measures鈥� and some 鈥渙utput measures鈥� that might be used to determine the extent of progress.
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