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P3-11. Right of return
Berger applies the variable consideration analysis, which indicates that
$200,000 – $10,000 – $2,000 = $188,000 is its best estimate of the amount it
will be entitled to receive related to 2019 sales. First Berger records the initial
sale of $200,000, allowing for $12,000 in returns:
Berger records cost of goods sold related to the sales revenue it recognized.
Because Berger has not recognized sales revenue on the $12,000 of sales it
expects to be returned, it does not recognize cost of goods sold related to it.
CR Inventory
When the $10,000 of returns are made, Berger records the following entry:
CR Cash
Berger also reinstates the inventory that is returned, eliminating a portion of the
Inventory recovery asset. The inventory that was returned had a cost of
CR Inventory recovery asset
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P3-12. Determining distinct performance obligations
Requirement 1:
The transaction price is $425,000, the consideration to which Sapra expects
to be entitled.
Requirement 2:
There are two performance obligations. The issue here is whether Gao can
benefit from each of the machines independently of the other. If so, there are
two distinct performance obligations. Because the machines are used
Requirement 3:
Because the two machines are distinct performance obligations, Sapra
determines when it is appropriate to recognize revenue for each of them
P3-13. Bill-and-hold
Revenue may be recognized under a bill-and-hold arrangement only if all of the
following criteria are met:
The reason for the arrangement is substantive.
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In scenario 1, the product is not separately identified as belonging to
In scenario 2, although the product has been labeled for Christiansen,
Gallemore is able to sell the product to another customer and replace
In scenario 3, all of the above criteria are met, so Gallemore may recognize
revenue, even before physically transferring the product. In this case, it is clear
P3-14. Gift cards with breakage
Requirement 1:
Maffett expects the gift cards to be used eventually to make purchases totaling
$250,000 x 99% = $247,500. In 2019, they were used to make purchases of
Note that Breakage revenue may be recognized only to the extent it is probable
a reversal will not be necessary.
Requirement 2:
If state law requires unused gift card proceeds to be remitted to the state under
escheat laws, breakage revenue is not recognized. Instead, Maffett would
make the following entries:
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When the gift cards expire, there will still be a balance in the liability. The
P3-15. Contract acquisition costs
Requirement 1:
Installation of the satellite dish is not a distinct performance obligation. The
customer cannot benefit from the installation of the dish without also
subscribing to the service. That interrelationship indicates there is a single
Requirement 2:
The cost of installing the dish is a contract acquisition cost – it is an
incremental cost incurred to secure the contract. The cost is amortized over the
P3-16. Customer options
The 100,000 paid nights generate an expected number of free nights of
100,000 / 5 x 70% = 14,000. So, the room purchases customers made in 2019
constitute two performance obligations – 100,000 paid nights and 14,000 free
nights. Each room-night has a standalone price of $300, so the aggregate
standalone prices are $30 million for the 100,000 paid nights and $300 x
Revenue may be recognized immediately on the paid nights. The journal entry
to record the 2019 purchases is as follows:
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During 2019, 10,000 free room nights were redeemed. Revenue may be
recognized on those rooms and the related liability is relieved. The amount of
revenue recognized is 10,000 times the amount associated with each
P3-17. Customer options
There are two performance obligations – the photographing of the wedding and
the printing of images. For $3,000 the customer gets the wedding
photographed, with a standalone price of $3,000 and a discount coupon. The
The revenue related to photographing the wedding may be recognized when
the service is provided to the customer, but revenue related to the discount
P3-18. Revenue recognition over time
At the end of each year, Grams must determine the cumulative amount of
revenue that may be recognized and recognize the amount in the current year
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P3-19. Variable revenue
At the end of each quarter, Skinner must assess the variable consideration to
determine the transaction price. As circumstances change, the transaction
price may be adjusted.
At the end of the first quarter, there were two outcomes for the variable portion
of the revenue, with a 40% chance of receiving an additional $250,000 and a
At the end of the second quarter, there was a 90% probability of receiving the
At the end of the third and fourth quarters, there was a zero probability of
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Quarter 1:
Quarter 2:
Quarter 3:
Quarter 4:
P3-20. Revenue recognition at a point in time and over time
In the first situation, where Ball sells access to a real-time data base, Ball has
granted the right to access its intellectual property as it exists at the time of
In the second situation, where Ball sells historical data, it has provided the
P3-21. Payments to customers
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Because the in-store advertising has no readily determinable market value, the
payment for it is considered a price discount on the sale of goods. Therefore,
P3-22. Revenue recognition over time
In recognizing revenue over time, Dale should take into account the pattern
Financial Reporting and Analysis (7th Edition)
Chapter 3 Solutions
Revenue Recognition
Cases
C3-1. Applying the 5-step model
Step 1: Identify the contract(s) with a customer.
Both parties are legally obligated to perform their obligations. The items being
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Step 2: Identify the performance obligations in the contract.
There is a single performance obligation. Franklin will not benefit from
Step 3: Determine the transaction price.
The contract has a variable consideration component. LeMoyne must
consider the probability that it will be entitled to the additional $100,000. As
there are two possibilities (it will or it will not be entitled to the $100,000), it
Step 4: Allocate the transaction price.
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation.
LeMoyne must determine whether revenue is to be recognized at a point in
time or over time. To recognize revenue over time, one of the following criteria
must be true:
The customer simultaneously receives and consumes the goods and
The first two criteria are not met. The customer does not benefit from the
work as it is done. The building is of no use until it is complete. Further, the
C3-2. Analyzing the reason for a practical expedient
It would be difficult, if not impossible, for firms to determine what their
estimates would have been for variable consideration at various dates. And,
even if those estimates could be replicated, they are just that – estimates –
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and certainly not as precise as using the actual consideration that resulted
Not including the practical expedient would have made the retroactive
C3-3. The meaning of control
The controller’s interpretation of control is more consistent with the meaning
of control under ASC paragraph 606-20-25-25. One of the criteria for having
In addition, Wilson has none of the other characteristics described in ASC
paragraph 606-20-25-25 as indicating control. Wilson may not use the asset
C3-4. Existence of a contract
ASC Topic 606 applies to contracts with customers, and it defines a customer
as “(a) party that has contracted with an entity to obtain goods or services
When multiple products are the output of a production process, one or more
of the outputs might be considered a by-product, or they might be considered
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The metal shavings are likely to be considered a by-product. That is,
Robertson is not in the business of producing metal shavings. Rather, it is in
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