301861 Flashcards
Imez Industries received a $30,000 prepayment from Aztec Associates for the sale of new equipment. Imez will bill Aztec an additional $70,000 upon delivery of the equipment. Upon receipt of the $30,000 prepayment, how much should Imez recognize for a contract asset, a contract liability, and accounts receivable (A/R)?
Contract asset: $0; contract liability: $30,000, A/R: $70,000
Contract asset: $30,000; contract liability: $0, A/R: $0
Contract asset: $30,000; contract liability: $0, A/R: $70,000
Contract asset: $0; contract liability: $30,000, A/R: $0
Contract asset: $0; contract liability: $30,000, A/R: $0
A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. If the contract asset represents an unconditional right to receive consideration (no future performance obligation), the asset should be presented as a receivable separately from contract assets. A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.
The $30,000 is a prepayment and is a contract liability. The $70,000 owed upon delivery is neither a contract asset nor an account receivable, because Imez has not fulfilled its performance obligation and therefore has no right to receive payment.
Contract Asset
A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).
FASB ASC Glossary
Contract Liability
A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.
FASB ASC Glossary
2331.03
The following terms have been added to the FASB ASC Master Glossary as a result of Topic 606:
Contract: An agreement between two or more parties that creates enforceable rights and obligations
Contract asset: An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance)
Contract liability: An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer
Customer: A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration
Performance obligation: A promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services) that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer
Revenue: Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations
Standalone selling price: The price at which an entity would sell a promised good or service separately to a customer
Transaction price: The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties
2331.63
Contract liability: If a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (that is, a receivable), before the entity transfers a good or service to the customer, the entity should present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.
2331.64
Contract asset: If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity should present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer.
2331.65
Contract receivable: If the contract asset represents an unconditional right to receive consideration (no future performance obligation), the asset should be presented as a receivable separately from contract assets.
A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due.
Upon initial recognition of a contract receivable, any difference between the measurement of the receivable and the corresponding amount of revenue recognized should be presented as an expense (for example, as an impairment loss).
ASU 2016-01
