Question

Consider each of the following scenarios:

1. A seller orally agrees with one of its best customers to deliver goods in exchange for $20,000. While the seller’s practice is to obtain a written sales agreement, the seller delivered these goods to the customer without a written agreement due to the customer’s urgent need.

2. A seller agrees to provide accounting services to a customer for the next year in exchange for $40,000. While the two parties are negotiating the terms of the agreement and the specific services to be performed, the seller begins to perform some services as a gesture of good faith.

3. A seller has a written agreement to deliver goods to a customer for $60 per unit. The price will drop to $55 per unit if the customer purchases more than 2,500 units per month.

4. A seller had a written agreement and provided custodial services to a customer for $2,500 per month in a previous year. The contract expired on December 31, 2016. During negotiations for a new contract in January 2017, custodial services were provided at the previous monthly rate and paid for by the buyer. The seller and the customer agree to a new contract on February 1, 2017. The seller is concerned whether a contract existed in January 2017 and whether revenue can be recognized.

Required:

1. Determine if a contract exists for each of the scenarios.

2. If it is determined that a contract exists but the seller believes it is probable that it will not collect the expected consideration, how does this affect the seller’s ability to recognize revenue?

Answer 1

1.  no, the contract does not exists in this scenario

If an entity’s standard practice is for both parties to sign a written contract defining the terms of the arrangement, then persuasive evidence of an arrangement exists only if a written contract is signed by both parties.

2. no, the contract does not exist in this scenario

If an entity’s standard practice is for both parties to sign a written contract defining the terms of the arrangement, then persuasive evidence of an arrangement exists only if a written contract is signed by both parties.

in this case since the negotiations are going on and there is no information about whether the witten contract after providing services has been completed or not.so, the contract does not exist in this scenario

3. yes, the contract exist in this scenario

since in this case the seller believes it is probable that it will not collect the expected consideration, the seller should not recognise revenue from this service immediately

explanation:

entities should apply the four general principles of revenue recognition, which are listed below, in determining when to recognize revenue from product sales:

• Persuasive evidence of an arrangement exists.

• Delivery has occurred or services have been rendered.

• The seller’s price to the buyer is fixed or determinable.

• Collectibility is reasonably assured.

4. no, the contract does not exist in jan 2017, since the consideration for this service has been received in jan 2017, it can recognise revenue at the time of reciept of considoration