Question

Identifying a Contract

Consider each of the following scenarios:

a.	A seller orally agrees with one of its best customers to deliver goods in exchange for $10,000. While the seller's practice is to obtain a written sales agreement, the seller delivered these goods to the customer without a written agreement due to the customer's urgent need.
b.	A seller agrees to provide accounting services to a customer for the next year in exchange for $40,000. While the two parties are negotiating the terms of the agreement and the specific services to be performed, the seller begins to perform some services as a gesture of good faith.
c.	A seller has a written agreement to deliver goods to a customer for $50 per unit. The price will drop to $45 per unit if the customer purchases more than 2,000 units per month.
d.	A seller had a written agreement and provided custodial services to a customer for $2,000 per month in a previous year. The contract expired on December 31, 2016. During negotiations for a new contract in January 2017, custodial services were provided at the previous monthly rate and paid for by the buyer. The seller and the customer agree to a new contract on February 1, 2017. The seller is concerned whether a contract existed in January 2017 and whether revenue can be recognized.

Required:

1. Determine if a contract exists for each of the scenarios.

a.	, a contract . An oral contract represent an enforceable contract the contract is approved by both parties, each party's rights can be identified, the payment terms can be identified, the contract has commercial substance, and it's probable that the company will collect the consideration to which it is entitled. All of these conditions appear to be in this scenario.
b.	, a contract . A company able to identify each party's rights regarding the goods or services to be transferred. Because these rights have established and be identified, a company assess when control has been transferred and, therefore, revenue be recognized.
c.	, this represent a contract. The payment terms to be fixed but can vary due to sales incentives such as rebates.
d.	, a contract exist in January 2017. While this requires judgment, the fact that the seller performed services and the customer paid for these services implies that enforceable rights and obligations existed in January 2017. , revenue be recognized even though final contract negotiations were not complete.

2. If it is determined that a contract exists but the seller believes it is probable that it will not collect the expected consideration, how does this affect the seller's ability to recognize revenue?

If it is probable that the seller will not collect the expected consideration in exchange for goods or services that it has promised to transfer to the customer, any amounts that the seller does not expect to collect will the transaction price. This adjusted transaction price will be the starting point to apply the remaining steps of the revenue recognition model.

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Answer 1