Question

Assume that Bombardier Inc. signs a contract to sell light-rail-transit (LRT) vehicles to the Region of Waterloo for a total price of $ 15 million. Included is a two year extended warranty valued at $1,500,000. Without the extended warranties the vehicles would sell for $14,000,000.

Instructions

Using this transaction as an example, illustrate the five steps in the revenue recognition process for Bombardier (State the step and use the information in the question to discuss / comment on the step criteria as outlined below).

Step 1

Explanation using question information

Step 2

Explanation using question information

Step 3

Explanation using question information

Step 4

Explanation using question information

Step 5

Explanation using question information

Answer 1

Answer:-

The five steps in the revenue recognition process for Bombardier:

Step one: Identify the contract with a customer.

explanation: Here, Bombardier Inc. signs a contract to sell light-rail-transit (LRT) vehicles to the Region of Waterloo for a total price of $ 15 million.

Identifying the contract or contracts with a customer is the first step in the framework for determining revenue recognition. The standard indicates that contracts may be written, oral, or implied by an entity’s customary business practices as long as the contracts are enforceable by law.

Without an agreement signed by both parties, revenue recognition generally is prohibited under current guidance even if all other general revenue recognition criteria have been met.

Step two: Identify each performance obligation in the contract.

Identifying performance obligations in a contract, the second step in the framework, is a significant change for companies. here, Bombardier Inc. signs a contract to sell light-rail-transit (LRT) vehicles to the Region of Waterloo for a total price of $ 15 million. Included is a two year extended warranty valued at $1,500,000. Without the extended warranties the vehicles would sell for $14,000,000. Bombardier Inc has the performance obligation to sell light-rail-transit (LRT) vehicles to region of waterloo with 2 year extended warranty for a total price of $ 15 million.

A performance obligation is defined as a promise in a contract with a customer to transfer to the customer a distinct good or service or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.

Step three: Determine the transaction price.

An entity will be required to determine the transaction price based on the amount of consideration to which it expects to be entitled, which may differ from the contract price. here, Bombardier Inc has signed a contract to sell light-rail-transit (LRT) vehicles to region of waterloo with 2 year extended warranty for a total price of $ 15 million. but if without the extended warranties, the vehicles would sell for $14,000,000. here, the transaction price can be $ 15 million or $ 14 million depending on the consideration that the goods are delivered with or without the extended warranty.

Step four: Allocate the transaction price to each performance obligation.

Some arrangements typically include various performance obligations. As a result, the allocation of the transaction price to these separate performance obligations is important. The transaction price should be allocated to each separate performance obligation, generally in proportion to its stand-alone selling price – the price at which an entity would sell a good or service on a stand-alone basis at contract inception. Companies will need to take into account variable consideration and allocate any variable consideration to one or more of the performance obligations.

Here, Bombardier Inc. signs a contract to sell light-rail-transit (LRT) vehicles to the Region of Waterloo for a total price of $ 15 million. Included is a two year extended warranty valued at $1,500,000. transaction price of the light-rail-transit vehicle and the transaction price of the warranty (1500,000) is to be allocated seperately.

Step five: Recognize revenue when or as each performance obligation is satisfied.

Satisfying the performance obligations is the final step in the revenue recognition framework. Under the standard, revenue is recognized when an entity satisfies a performance obligation by transferring a promised good or service to the customer – that is, when the customer obtains control.

Bombardier Inc. can recognize it's revenue when they deliver the light-rail-transit (LRT) vehicles to the Region of Waterloo and when the customer pays for it.