Five Steps of Revenue Recognition

Question 1

What are the five steps of revenue recognition?

Answer 1

1) Identify the contract with a customer
2) identify the performance obligation
3) Determine the transaction price
4) Allocate the transaction to the performance obligations in the contract
5) Recognize revenue when the entity satisfies the performance obligation(s).

Question 2

What is the criteria of a contract?

Answer 2

• Approve the contract
• Rights to the goods or services
• commercial substance
• Collectible

Question 3

What is a performance obligation?

Answer 3

Distinct good or service

Contracts can have a single performance obligation or multiple performance obligations

If it is single obligation, you assign the entire transaction price to it. If it is multiple, then you break out the transaction price and allocate it to the difference performance obligations.

Question 4

What type of terms may impact the transaction price?

Answer 4

Variable consideration (Performance bonus) 
Significant financing component (interest revenue) 
Non-cash consideration

Question 5

What are indicators that control has transferred?

Answer 5

Seller has present right to payment
customer has legal title to asset
Physical possession transferred to customer
Customer has accepted the asset

Question 6

T/F: Performance obligations can be satisfied over time?

Answer 6

True

Question 7

What are the two method to record performance obligations over time?

Answer 7

Output Method- Recognize revenue based on goods transferred versus those that remain

Input Method: Measure revenue based on proportion of expected inputs (costs incurred/total expected cost)

Question 8

What is a contract asset?

Answer 8

A contract asset account is when you deliver one portion of your agreement but it is CONDITIONAL on the delivery of a second portion. When you deliver the first portion, you can record revenue and debit contract asset until the other portion has been completed.