Question

On October 1, 2018, Bullseye Company sold 250,000 gallons of diesel fuel to Schmidt Co. at $3 per gallon. On November 8, 2018, 150,000 gallons were delivered; on December 27, 2018. Another 50,000 gallons were delivered; and on January 15, 2019, the remaining 50,000 gallons were delivered. Payment terms are 10% due on October 1, 2018, 50% due on first Delivery; 20% due on the next delivery; and the remaining 20% due on final delivery.

1. Do each of the three deliveries represent a distinct performance obligation, or is there a single performance obligation requiring three deliveries?

2. What amount of revenue should bullseye recognize from this sale during 2018?

Answer 1

1) Performance obligation is a promise in a contract with a customer to transfer to the customer either:

• a good or service (or a bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

In this question, Bullseye Company sold 250,000 gallons of diesel fuel to Schmidt Co. at $3 per gallon on October 1, 2018. As the company contracts with customer for selling 250,000 gallons, there will be a single performance obligation of the company to deliver this 250,000 gallons to customers which is delivered by customer in three deliveries. Thus there is a single performance obligation requiring three deliveries.

2) Sales revenue is recognized at the date of delivery, because that generally is the time at which a sale has occurred. At that point two criteria for revenue recognition were met; the revenue is  

1) realized or realizable and

2) it is earned.

As revenue earned at the end of 2018 is 80% of the total consideration (10% on October 1, 2018, 50% on first delivery, 20% on second delivery) and first and second delivery is performed by the company.

Therefore, the amount of sales revenue recognized in 2018 should be 80% of $750,000 (250,000*$3) (i.e. $750,000*80% = $600,000)

Alternatively, as during 2018 only 200,000 gallons are delivered (150,000 gallons on November 8, 2018 and 50,000 gallons on December 27, 2018). The total revenue recognized will be $600,000 (i.e. 200,000 gallons*$3 per gallon)