Revenue Recognition

Practice As You Learn

Practice as You Learn

 

Practice Problem 1: Revenue Recognition Process

Determine the correct order of the following steps:

Step ___: Identify the performance obligations in the contract: single or multiple
Step ___: Recognize revenue when each performance obligation is satisfied
Step ___: Identify the contract with the customer (legal rights of the seller & customer)
Step ___: Record revenue when the seller receives the cash
Step ___: Determine the transaction price: entitled to receive from the customer
Step ___: Allocate the transaction price to each performance obligation

Answer

Step 1: Identify the contract with the customer (legal rights of the seller & customer)

Step 2: Identify the performance obligations in the contract: single or multiple

Step 3: Determine the transaction price: entitled to receive from the customer

Step 4: Allocate the transaction price to each performance obligation

Step 5: Recognize revenue when each performance obligation is satisfied

The receipt of cash has no impact on when revenue is reported

Practice Problem 2: Franchisor Revenue

Rolly Polly Sandwiches, Inc. sells franchises for a total fee of $20,000. Half the fee is for site selection and assistance establishing operations at the restaurant site (completed in 3 months). Half the fee is for monthly business consulting and on-going training over the 5-year franchise agreement. The company sold 5 franchisee rights during the first half of the current year and the franchisees all began operations in July.

 

A. Identify the performance obligations
B. Determine the price of each performance obligation.
C. Record the transactions for the franchisor for the first year.
Answer

A. Performance Obligations:

Site selection
Assist with establishing operations at the restaurant site
Monthly business consulting and ongoing training

 

B. Determine the price of each performance obligation:

5 franchise rights x $20,000 each = $100,000 total initial fees

For site selection and establishing the restaurant site

Earn 50% x $100,000 = $50,000 at the end of 3 months

 

For ongoing consulting and training over the agreement period

50% x $100,000 = $50,000 / 5 years = $10,000 each year for 5 years

Earn ½ the year in the current year $10,000 x ½ = $5,000

 

C. Record transactions related to revenue

 

Site selection and establish operations at the site:

       Cash                                         100,000

         Unearned Franchise Fee Revenue       100,000

Unearned Franchise Fee Revenue          50,000
          Franchise Fee Revenue                           50,000

Monthly consulting and training

         Cash                                     5,000
            Franchise Fee Revenue          5,000

Practice Problem 3: Multiple Distinct Performance Obligations

On January 1st, Gemini, Inc. sold software with a one-year service plan for a total price of $1,000. The software and service plan have stand-alone prices of $600 and $900, respectively.

 

A. Make the entry to record revenue on the date the customer accepts the software.
B. Make the entry at the end of the year, given Gemini, Inc. prepares annual financial statements only.

Answer

1st: Allocate the total price to the two separate performance obligations:

Stand-alone price % of Total Allocated Revenue
Software: $600 40% $400

Services:

$900

60%

$600

Total $1500 100% $1000


Recognize $400 software sales revenue upon delivery and acceptance

Recognize $600 service revenue allocated to each month as time passes

A. On the date the customer accepts the software:

Cash                            $1,000
            Sales Revenue                    $400
            Deferred Revenue             $600

 

Sales revenue is revenue when delivered

Deferred revenue will become revenue as time passes

 

B. At the end of the year:

 

Deferred Revenue             $600
             Service Revenue             $600

or, each month:

            Deferred Revenue             $50
                        Service Revenue            $50