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Intermediate Accounting, 8/e 5-101
Problem 5-2 (concluded)
Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices,
as follows:
$78,000,000
Transaction Price
Problem 5–3
Requirement 1
Number of performance obligations in the contract: 3.
Delivery of a Protab computer is one performance obligation.
The option to purchase a Probook at a 50% discount is a second performance
obligation because it provides a material right to the customer that the customer
would not receive otherwise. The option is capable of being distinct because it
could be sold or provided separately, and it is separately identifiable, as it is not
Intermediate Accounting, 8/e 5-103
Problem 5-3 (continued)
Requirement 2
Allocation of purchase price to performance obligations:
Performance
obligation:
Stand-alone
selling price of
the performance
obligation:
Percentage of the
sum of the stand-
alone selling prices
of the performance
obligations (to two
decimal places):
Allocation of
total transaction
price to each
performance
obligation:
Protab tablet
$76,000,0001
93.83%4
$73,187,4007
Problem 5-3 (concluded)
Requirement 3
Creative then allocates the total selling price based on stand-alone selling prices,
as follows:
The journal entry to record the sale is:
Cash ($800 × 100,000 units)
78,000,000
$78,000,000
Transaction Price
Intermediate Accounting, 8/e 5-105
Problem 5-4
Requirement 1
The delivery of Supply Club’s normal products is one performance obligation.
The promise to redeem loyalty points represent a material right to customer that they
would not receive otherwise, so that loyalty points represent a second performance
Because there are two performance obligations associated with a single
transaction price ($135,000), the transaction price must be allocated between the two
performance obligations on the basis of stand-alone prices.
Supply Club’s estimated stand-alone selling price of the loyalty points is:
Value of the loyalty points:
Supply Club must identify each performance obligation’s share of the sum of the
stand-alone selling prices of all deliverables:
Problem 5-4 (concluded)
Supply Club then allocates the total selling price based on stand-alone selling
prices, as follows:
Requirement 2
Cash ($60,000 × 75% × 80%)*
36,000
$135,000
Transaction Price
Intermediate Accounting, 8/e 5-107
Problem 5–5
Requirement 1
The contract requires 6 payments of $20,000, plus or minus $10,000 at the end of
the contract. So the contract will provide either [(6 $20,000) + $10,000] =
$130,000, or [(6 $20,000) – $10,000] = $110,000.
Revis would estimate the expected value of the transaction price as follows:
Possible Expected
Prices Probability Consideration
$130,000 ([$20,000 6] + $10,000) 80% $104,000
Requirement 2
After six months the bonus receivable will have accumulated to $6,000 (6
Problem 5-5 (concluded)
Requirement 3
If Revis pays the penalty, it will record the following entry:
Intermediate Accounting, 8/e 5-109
Problem 5–6
Requirement 1
Cash
80,000
Requirement 2
Deferred revenue ($80,000 ÷ 10)
8,000
Requirement 3
Deferred revenue ($80,000 ÷ 10)
8,000
Problem 5–7
Requirement 1
Requirement 2
Deferred revenue ($80,000 ÷ 10)
8,000
Intermediate Accounting, 8/e 5-111
Problem 5-8
Requirement 1
At the contract’s inception, Velocity calculates the transaction price to be the
expected value of the two possible eventual prices:
Possible Expected
Prices Probabilities Consideration
Problem 5–8 (continued)
Requirement 2
By the end of the fourth month, the bonus receivable account would have a
balance of $6,000 (4 $1,500), equal to half of the expected value of the bonus of
So, after four months, the bonus receivable account should have a balance of
$2,000, which is half of the new expected value of the bonus of $4,000 ($484,000 –
Intermediate Accounting, 8/e 5-113
Problem 5–8 (concluded)
Requirement 3
Because services are provided evenly over the eight months, Velocity would
recognize revenue of $60,500 ($484,000 ÷ 8 months) in each of months five through
Requirement 4
At the end of contract, Velocity learns that it will receive the bonus of $20,000. It
already has recognized revenue of $4,000 associated with the bonus. Therefore,
Problem 5-9
Requirement 1
The FASB Accounting Standards Codification® represents the single source of
authoritative U.S. generally accepted accounting principles. Regarding accounting
for sales-based royalties from licenses, the appropriate citation is:
FASB ASC 606–10–55–65: “Revenue from Contracts with Customers–
Requirement 2
If Tran accounts for the Lyon license as a right of use that is conveyed on April 1,
Requirement 3
Tran recognizes revenue for sales-based royalties in the period in which
uncertainty is resolved. Tran earned $1,000,000 of royalties on Lyon’s sales in
2016, so it should recognize revenue in that amount. The journal entry would be:
Intermediate Accounting, 8/e 5-115
Problem 5–9 (concluded)
Requirement 4
If Tran accounts for the Lyon license as an access right for the period from April
1, 2016, through March 31, 2021, Tran cannot recognize any revenue on April 1,
2016, because it fulfills its performance obligation over the access period and no
time has yet passed. Instead, Tran must recognize deferred revenue of $500,000.
The journal entry would be:
Problem 5–10
Requirement 1
2016 2017 2018
Contract price $10,000,000 $10,000,000 $10,000,000
Actual costs to date 2,400,000 6,000,000 8,200,000
Revenue recognition:
Gross profit (loss) recognition:
2016: $3,000,000 – 2,400,000 = $600,000
Note: Also can calculate gross profit directly using the percentage of completion:
2016: $2,400,000
Intermediate Accounting, 8/e 5-117
Problem 5–10 (continued)
Requirement 2
2016
2017
2018
Construction in progress
2,400,000
3,600,000
2,200,000
Various accounts
2,400,000
3,600,000
2,200,000
To record construction costs
contract
To record progress billings
Construction in progress
600,000
900,000
300,000
Requirement 3
Balance Sheet
2016
2017
Current assets:
$ 200,000
$600,000
Note: Construction in progress in excess of billings is a contract asset; Billings
Problem 5–10 (continued)
Requirement 4
2016 2017 2018
Costs incurred during the year $2,400,000 $3,800,000 $3,200,000
2016 2017 2018
Contract price $10,000,000 $10,000,000 $10,000,000
Revenue recognition:
2016: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
Gross profit (loss) recognition:
2016: $3,000,000 – 2,400,000 = $600,000
Intermediate Accounting, 8/e 5-119
Problem 5–10 (continued)
Note: Also can calculate gross profit directly using the percentage of completion:
2016: $2,400,000
Requirement 5
2016 2017 2018
Costs incurred during the year $2,400,000 $3,800,000 $3,900,000
Estimated costs to complete
Revenue recognition:
2016: $2,400,000
= 30.0% × $10,000,000 = $3,000,000
Problem 5–10 (concluded)
Gross profit (loss) recognition:
2016: $3,000,000 – 2,400,000 = $600,000
