Question

In: Accounting

Existence of a contract (LO 3-2) Robertson, Inc., manufactures metal products. As part of the manufacturing...

Existence of a contract (LO 3-2)

Robertson, Inc., manufactures metal products. As part of the manufacturing process, metal shavings are produced. Rather than disposing of the metal shavings, Robertson sells them to a metal recycler.

Required:

Draft a memo discussing whether Robertson’s sale of metal shavings to the recycler is subject to ASC Topic 606?

Solutions

Expert Solution

ASC 606 provides accounting guidance related to revenue from contracts with customers. The guidance applies to all entities and to all contracts with customers

ASC 606-10 provides the following overview of how revenue is recognized from an entity's contracts with customers:

The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

An entity recognizes revenue in accordance with that core principle by applying the following steps:

  1. Step 1: Identify the contract(s) with a customer—A contract is an agreement between two or more parties that creates enforceable rights and obligations. The guidance in this Topic applies to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, this Topic requires an entity to combine contracts and account for them as one contract. This Topic also provides requirements for the accounting for contract modifications.
  2. Step 2: Identify the performance obligations in the contract—A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
  3. Step 3: Determine the transaction price—The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price also is adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
  4. Step 4: Allocate the transaction price to the performance obligations in the contract—An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. The requirements specify when an entity allocates the discount or variable consideration to one or more, but not all, performance obligations (or distinct goods or services) in the contract.
  5. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation—An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress toward complete satisfaction of that performance obligation.

In addition, ASC 606-10 contains guidance on the disclosures related to revenue, and notes the following:

This Topic also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Specifically, Section 606-10-50 requires an entity to provide information about:

  1. Revenue recognized from contracts with customers, including the disaggregation of revenue into appropriate categories
  2. Contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities
  3. Performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract
  4. Significant judgments, and changes in judgments, made in applying the requirements to those contracts.

Therefore according to ASC 606 "Robertson’s sale of metal shavings to the recycler is subject to ACS 606"


Related Solutions

Existence of a contract (LO 3-2) The time frame in each of these scenarios is after...
Existence of a contract (LO 3-2) 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. A regular customer of Amiel’s always places an order on the last day of the month, but did not do so...
Part 2 of 5 - Part 2 The Outdoor Furniture Corporation manufactures two products, benches and...
Part 2 of 5 - Part 2 The Outdoor Furniture Corporation manufactures two products, benches and picnic tables, for use in yards and parks. The firm has two main resources: its carpenters (labor force) and a supply of redwood for use in the furniture. During the next production cycle, 1,200 hours of labor are available under a union agreement. The firm also has a stock of 3,500 feet of good-quality redwood. Each bench that Outdoor Furniture produces requires 4 labor...
P4.1A (LO 1, 2, 3), AP Combat Fire, Inc. manufactures steel cylinders and nozzles for two...
P4.1A (LO 1, 2, 3), AP Combat Fire, Inc. manufactures steel cylinders and nozzles for two models of fi re extinguishers: (1) a home fi re extinguisher and (2) a commercial fi re extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds of multi-purpose dry chemical at 480 PSI. The commercial model is a low-volume (10,200 units), two-gallon cylinder that holds 10 pounds of multi-purpose dry chemical at 390 PSI. Both products require...
Compute overhead rates and assign overhead using ABC. (LO 2, 3), AP Air United, Inc. manufactures...
Compute overhead rates and assign overhead using ABC. (LO 2, 3), AP Air United, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhead costs reveals the following activities. Activities Cost Drivers Total Cost 1. Materials handling Number of requisitions $40,000 2. Machine setups Number of setups  21,500 3. Quality inspections Number of inspections  33,000 $94,500...
Required information Foundational [LO 2-1, LO 2-2, LO 2-3, LO 2-4, LO 2-6, LO 2-7] [The...
Required information Foundational [LO 2-1, LO 2-2, LO 2-3, LO 2-4, LO 2-6, LO 2-7] [The following information applies to the questions displayed below.] Martinez Company’s relevant range of production is 8,500 units to 13,500 units. When it produces and sells 11,000 units, its unit costs are as follows: Amount Per Unit   Direct materials $ 6.10   Direct labor $ 3.60   Variable manufacturing overhead $ 1.40   Fixed manufacturing overhead $ 4.10   Fixed selling expense $ 3.10   Fixed administrative expense $ 2.10...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis):     Year 1   Year 2   Year 3 Sales   $   1,040,000      $   882,000      $   1,040,000      Cost of goods sold      880,000         720,000         924,000         Gross margin      160,000         162,000         116,000      Selling and administrative expenses      150,000  ...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 780,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 260,000 215,000 Selling and administrative expenses 230,000 200,000 230,000 Net operating income (loss) $ 30,000 $ 60,000 $ (15,000 )    In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 780,000 $ 1,000,000 Cost of goods sold 740,000 520,000 785,000 Gross margin 260,000 260,000 215,000 Selling and administrative expenses 230,000 200,000 230,000 Net operating income (loss) $ 30,000 $ 60,000 $ (15,000 )    In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,000,000 $ 730,000 $ 1,000,000 Cost of goods sold 760,000 512,000 788,500 Gross margin 240,000 218,000 211,500 Selling and administrative expenses 230,000 198,000 230,000 Net operating income (loss) $ 10,000 $ 20,000 $ (18,500 )    In the latter part...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as...
Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Results for the first three years of operations were as follows (absorption costing basis): Year 1 Year 2 Year 3 Sales $ 1,100,000 $ 852,000 $ 1,100,000 Cost of goods sold 840,000 592,000 890,000 Gross margin 260,000 260,000 210,000 Selling and administrative expenses 230,000 200,000 230,000 Net operating income (loss) $ 30,000 $ 60,000 $ (20,000 ) In the latter part of...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT