Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction...

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome.

A. How should Felix determine the transaction price under FASB ASC 606 for this contract?

B. Assume that Felix has limited experience with a construction project on the same scale as the 10 yachts. How should Felix determine the transaction price for this contract?

Expert Solution

As per FASB ASC 606-Revenue from Contract with Customers, "An entity should recongnize revenue to depict the transfer to goods and services to customer that reflects the consideration in which the Entity EXpects to Entitled in Exchange of Goods or Services".

In the Present case of Flexicrop while Estimating the Transaction value which on has to Book in case of delivery of ships, Transaction value will includes amount of Consideration a entity will expects to include while performing the contract.

In First case, as Felix is Experienced in Making of Boats and with the Historical Data of Estimation the Probability of Completion of Contract within dates to accumulate Bonus is 25%, so in this case along with the Contract Value of $10,000,000 he should also book Bonus to the Extent of 25% which is $25000(100000*25%).

In the Second case, As Flexi has limited experince the probability of gaining Bonus is minimum and supports no any historical data, so in this case only the Contract Money of $10,000,000 will be recongnized

ekkarill92 answered 1 year ago

A company is evaluating a revenue arrangement to determine proper revenue recognition. The contract is for...

A company is evaluating a revenue arrangement to determine proper revenue recognition. The contract is for manufacturing 20 race cars. The customer needs the cars by May 1, 2021. The customer provides a bonus payment of $320,000 if all cars are delivered by the May 1 deadline. The bonus is reduced by a fourth of the total available bonus amount (i.e., reduced by $320,000 divided by 4) each week that the cars are delivered after the deadline until no bonus...

(1) What do we mean by revenue recognition? What does GAAP say about proper revenue recognition?...

(1) What do we mean by revenue recognition? What does GAAP say about proper revenue recognition? (2) Why is the audit of revenue recognition riskier for a new company? (3) What are some justifications for not using confirmations of accounts receivable on a particular audit?

In Unit 3 we learn about recognition of revenue and expenses, and the proper timing of...

In Unit 3 we learn about recognition of revenue and expenses, and the proper timing of their recording in the firm's accounting records. For those of us accustomed to thinking of revenue and expense occurring at the time payments are made and money changes hands, this may be a new and unfamiliar concept - but it is an important one. Discuss the difference between accrual basis accounting and cash basis accounting. Please remember to create your submission in your own...

What does article mean? Revenue Recognition Revenue recognition for multiple-element arrangements requires judgment to determine if...

What does article mean? Revenue Recognition Revenue recognition for multiple-element arrangements requires judgment to determine if multiple elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements. Judgment is also required to assess whether future releases of certain software represent new products or upgrades and enhancements to existing products. Certain volume licensing arrangements include a perpetual license for current products combined with rights to receive unspecified...

What are the new reporting and disclosure requirements for revenue recognition? Why is revenue recognition a...

What are the new reporting and disclosure requirements for revenue recognition? Why is revenue recognition a Big Deal?

In Chapter 6 you learned about revenue recognition as well as evaluating receivable balances and establishing...

In Chapter 6 you learned about revenue recognition as well as evaluating receivable balances and establishing an allowance for bad debts. Access Starbucks 10-K and answer the following (hint: you will need to explore the first footnote): 10-K link: https://www.sec.gov/Archives/edgar/data/829224/000082922414000041/sbux-9282014x10k.htm#s6571E5A222BF69F5F8068EA40E001FDA Starbucks has provided detail for 3 categories of net revenue shown on the income statement. List each category and provide a brief summary of each category, including information such as (but not limited to): the amount of revenue in the...

There are five revenue recognition? criteria. 1.Identify the contract with the customer. 2.Identify the performance obligations....

There are five revenue recognition? criteria. 1.Identify the contract with the customer. 2.Identify the performance obligations. 3.Determine the transaction price. 4.Allocate the transaction price to performance obligations. 5.Recognize revenue in accordance with performance. There are some situations.a. a.An apartment owner receives a deposit of? $1200 equal to one? month's rent. b.An insurance company receives annual premiums for fire insurance on June 25 for coverage beginning July 1. c.A city transit authority issues? 200,000 monthly passes at? $80 each for sale...

Two undergraduate accounting learners discussed the timing of revenue recognition for long-term construction contracts in their...

Two undergraduate accounting learners discussed the timing of revenue recognition for long-term construction contracts in their online course discussion area. The discussion focused on which method was most like the typical revenue recognition method of recognizing revenue at the point of product delivery. William argued that recognizing revenue upon project completion was preferable because it was analogous to recognizing revenue at the point of delivery. Sarah disagreed and supported recognizing revenue over time, stating that it was analogous to accruing...

In Enron's bankruptcy, "Revenue Recognition" was one of the major issues. First, summarize the revenue recognition...

In Enron's bankruptcy, "Revenue Recognition" was one of the major issues. First, summarize the revenue recognition issue in Enron Bankruptcy. Second, as an auditor, what type of evidence would you want to examine to determine whether Enron was inappropriately recording revenue from the Sithe Energies contract?

The revenue recognition model promises to provide a coherent and consistent revenue recognition framework for all...

The revenue recognition model promises to provide a coherent and consistent revenue recognition framework for all companies to follow. Do you agree? Explain. (hint: you may wish to discuss the advantages and disadvantages of the model)

Question