Question

FINANCIAL REPORTING & ANALYSIS - chapter 3- Question E3-1

The time frame in each of these scenarios is after the effective date of the new revenue recognition

rules in ASC Topic 606.

Required:

For each of the following independent situations, determine the point at which a contract

exists and is subject to application of the 5-step revenue recognition model by Amiel

Corporation.

1. A regular customer of Amiel’s always places an order on the last day of the month,

but did not do so in December. Amiel is certain it is because the customer’s

purchasing

manager was ill and that the order will be received when she returns. In

fact, the order is received by fax in early January, with an apology from the customer’s

purchasing

manager and a note requesting that Amiel “expedite shipment of this

December order.”

2. One of Amiel’s customers calls and gives Amiel a list of goods it intends to buy, but with

the caveat that the order is subject to the approval of the purchasing manager, who will

not be in for several days. In fact, the order is received by fax several days later when the

purchasing manager returns.

3. One of Amiel’s customers calls and gives Amiel an order. Amiel typically receives orders

by fax and asks the customer to confirm the order by fax, which it does several days later.

4. Amiel and one of its customers agree that Amiel will sell it certain goods, but that the

price will depend on the price of oil two weeks later. Amiel and the customer have agreed

on a formula that will determine the price of the goods based on the price of oil. Amiel

makes this arrangement because oil is a key component of the goods Amiel sells

Answer 1

1. There is no legally binding a contract between the parties at the end of year and also in January until the order received by fax

2. There is no contract until the order is received by fax. Customer has intended to purchase but he didn't place any order. Order cannot be confirmed until it was approved by purchasing manager.

3. Given scenario creates an order as it is received over phone. There is oral contract between two parties and legally binding upon.

4. Contract is formed when amiel and customer agreed. But price should be certain for the contract agreed