Question

QUESTION 5

1. Part V:
   
   Background       
   On January 15, KH sold a mixer it purchased from MU for $80 cash and delivered it to a customer. As part of this purchase, KH issued a coupon to the customer for 8% off the $25 selling price for MU’s new titanium replacement mixer blades (assume the 8% discount constitutes a material right provided to the customer). It is valid for 90 days. KH has not previously sold replacement mixer blades. KH’s management estimates that 50% of the coupons will be redeemed.
   Requirements
   ►      Prepare a detailed explanation of each of the five steps of revenue recognition. Record all accounting entries for this transaction for KH for January 15 based on guidance on revenue recognition in ASC 606. Include references to the guidance to support your proposed accounting. Show any calculations you make to support your journal entries.

Answer 1

Ans.(1)

The ASC 606 5 Step Model

• Identify the contract with a customer
  This step outlines the criteria that must be met when establishing a contract with a customer to supply goods or services.
• Identify the performance obligations in the contract
  This step describes how distinct performance obligations in the contract must be handled.
• Determine the transaction price
  This step outlines what must be considered when establishing the transaction price, which is the amount the business expects to receive for transferring the goods and services to the customer.
• Allocate the transaction price
  This step outlines guidelines for allocating the transaction price across the contract’s separate performance obligations, and is what the customer agrees to pay for the goods and services.
• Recognize revenue when or as the entity satisfies a performance obligation
  Revenue can be recognized as the business meets each performance obligation. This step specifies how that should happen.

Ans.(2)

Accounting Enties

Date	Particulars	Dr.($)	Cr.($)
Jan.15	Cash a/c Dr. To Revenue a/c To contract liability a/c	80	79 1
	Contract liability a/c Dr. To Revenue a/c	1	1