Question

Each of the following are independent situations. For each of the situations, use the 5-step process to determine when revenue can be recognized by indicating for each of the situations:

1. If a contract exists

2. The performance obligations in the contract

3. The transaction price in the contract

4. How the transaction price is allocated to the performance obligations.

5. When revenue is recognized

Situation A:

Freddy Flyer books travel on an airline on June 2, 2027. He pays $500 for a round-trip ticket that departs July 15, 2027 and returns July 20, 2027. In addition, once the round-trip ticket is used, the airline credits Freddy’s frequent flyer account for 500 miles based on a $.01 value for each frequent flyer point.

Situation B:

Dave’s Discount Emporium and Creative Construction, Inc. enter into a contract on May 1, 2027. Creative will build a new warehouse for Dave at a price of $2,000,000. Dave will make four equal payments to Creative over the 1-year construction period with the first payment made on May 1, 2027 and the other payments made every 4 months. Dave can cancel the construction at any time and will own any parts of the construction to date; however, it must pay Creative for work done up to the date of cancellation. The building is completed on April 30, 2018.

Situation C:

Doggone Good Donuts agrees to supply donuts and coffee to Better Brakes, a local business that manufacturers automobile break components, on a daily basis. The contract starts on January 1, 2027, and runs for 1 year. Doggone charges $400 per week for the donuts and coffee.

Situation D:

The Northville Nuggets sell four season tickets to a customer. The Nuggets play 10 regular season games, and the cost of one season ticket is $250.

Situation E:

Lazy Days Inc. enters into a contract with Hyper Hands Co. to sell it $50,000 of goods with delivery on May 10, 2027. Lazy manufactured the goods at a cost of $33,000. The contract is signed on April 15, 2027 and Hyper pays $25,000 at that time Lazy delivers the goods on May 10, 2027, and receives the final payment.

Answer 1

Situation A:

Contract came into existence on June 2, 2027. The performance obligation is completed on July 20, 2027. Transaction price is $ 500. The frequent flier account is credited once the round trip is complete. So, the revenue is to be recognized on July 20, 2027 when the services are rendered and performance obligations met.

Situation B:

Contract is entered on May 1, 2027. However, the payments are made every four months starting from May 1, 2027. Contract price is $ 2 Million. Revenue is to be recognized on the basis of percentage of competition method i.e. revenue to be recognized on the basis of parts of construction completed. So, as soon as a particular percentage of construction is complete the revenue needs to be recognized with the 100% revenue of the project recognized on April 30, 2018 with the final payment to be received on May 01, 2018. So, whatever percentage of work is completed on daily basis that revenue needs to be recognized so in this case 0.274% on an average basis i.e. a percentage of performance obligations that is met, that needs to be recognized as revenue.

Situation C:

Contract was entered in January 01, 2027. The performance obligation is to deliver donuts and coffee every day. Transaction price is $ 400 every week. The revenue needs to be recognized as soon as the goods are delivered. Assuming, the work days to be 6 work days in a week. The revenue of $ 400/6 = $ 66.67 needs to be recognized every day once the goods are delivered (I.e. performance obligation met).

Situation D:

As soon as a season happens the revenue of $250 needs to be booked regardless of the fact whether the customer attended the season or not. So all the revenue of $1000 is booked once all the season happens. (Performance obligations are met once the season happens).

Situation E:

Contract is entered on April 15, 2027. Once, the goods are delivered on May 10, 2027 the revenue needs to be booked at $ 50,000 regardless of the fact that $ 25,000 was received on April 15, 2027 and rest of the contract is executed on May 10, 2027. So, the performance obligations are me on May 10, 2027 and that is when the revenue needs to be recognized.