Question

1. The new ASC Topic 606 provides a model for revenue recognition that includes:

Multiple Choice

• two steps.

• four steps.

• five steps.

• three steps.

2. Which of the following statements is true regarding the five-step model in the ASC Topic 606 guidance for revenue recognition?

Multiple Choice

• The transaction price is not relevant.

• If a sale is not paid for on time, the seller should not recognize revenue.

• The performance obligations in the contract need to be identified.

• The sale itself is the sole criterion for recognizing revenue.

Answer 1

Ans 1: Five steps

Explanation is as follows

New ASC topic 606 provides five step model for revenue recognition which includes following

Step 1: Identify the contract with customer

Step 2:Identify performance obligations

Step 3:Determine the Transaction price

Step 4:Allocate the transaction price to the performance obligation

Step 5:Recognize Revenue when or as the performance obligations are satisfied

Ans 2 :The performance obligations in the contract need to be identified.

Explanation is as follows

New ASC topic 606 provides five step model for revenue recognition which includes following

Step 1: Identify the contract with customer

Step 2:Identify performance obligations

Step 3:Determine the Transaction price

Step 4:Allocate the transaction price to the performance obligation

Step 5:Recognize Revenue when or as the performance obligations are satisfied

from above it is clear that step 2 which is stating performance obligations in the contract need to be identified.

Reason why other options are wrong

• The transaction price is not relevant:it is false since we transaction price is one of the step for recognizing revenue ( step 3)

• If a sale is not paid for on time, the seller should not recognize revenue.: it is false since we have performance obligation is the basis to recognize revenue

• The sale itself is the sole criterion for recognizing revenue:it is false since sale itself is not the only criterion we have five steps that need to be taken into consideration