Question

Schwartz offers its customers payment terms of 1/10, n/30, where purchasers making payment within 10 days of product receipt will receive a discount of 1% of the purchase price, or must pay the full balance due within 30 days. Schwartz has just received payment from a new customer who paid within the 10-day window and is thus entitled to the 1% discount. This discount will not result in a loss to Schwartz on the sale of the product.

Required: 1. Determine how Schwartz should account for this discount using ASC 606-10. 2. Explain how you located the relevant guidance, including the search method used, and which sections you reviewed within Topic 606.

Answer 1

Solution:-

Required: 1. Determine how Schwartz should account for this discount using ASC 606-10Required: 1. Determine how Schwartz should account for this discount using ASC 606-10:-

Schwartz Glass should record the cost of the sale incentive at the later ofthe date at which the related revenue is recognized, or by the date at which the sales incentive is offered.This guidance provides clarification for revenue recognition dates, to vendors who offer incentives for theircustomers.

2. Explain how you located the relevant guidance, including the search method used, and which sections you reviewed within Topic 606:-

606-10-05-4 An entity recognizes revenue in accordance with that core principle by applying the following steps: a. 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. (See paragraphs 606-10-25-1 through 25-13.)

b. 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. (See paragraphs 606-10-25-14 through 25-22.) c. 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. (See paragraphs 606-10-32-2 through 32-27.) d. 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. (See paragraphs 606-10-32-28 through 32-41.) e. 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. (See paragraphs 606-10-25- 23 through 25-30.)