Question

Latter Corporation received an order from Murray, Inc. for electronic components. Because

Murray is struggling financially, Latter called the company and said it will get ready to fulfill

the order, but it will not ship the order until payment is received by cashier’s check.

Required:

Does Latter have a contract with Murray that is subject to the 5-step revenue recognition

model?

Answer 1

The Five step model for revenue recognition is as follows :

a) Identify the Contract

b) Identify the separate performance obligation

c) Determine the transaction price

d) Allocate the transaction price to the separate performance obligations

e) Recognise revenue when the entity satisfy a performance obligation

In the current scenario, Latter have a contract with Murray. However, as decided between Latter and Murray the goods will be delivered only when payment is received by cashier's check.This indicates that the obligation under contract will be fulfilled only when the Murray will make payment to Latter and Latter will dispatch the goods. The right to recognise the revenue will arise when the Latter will transfer the goods to Murray, not before that. This indicates that the performance obligation will be satisfied on delivery of goods to Murray and Latter can recognise revenue only after fulfillment of performance obligation.