Lesson 3 Flashcards
Contract assets and contract liabilities are on what financial statement?
Balance Sheet
What is a contract asset?
Example
When General Mills delivers cereal to Whole Foods (satisfying its performance obligation) it has a right to consideration from Whole Food, which means General Mills has a contract asset.
What is a contract liability?
Example
When Whole Food performs the obligation first. They prepaid for the cereal. Which means that General Mills has a contract liability.
What are the two types of contract assets?
- Unconditional
- Conditional
What is a conditional contract asset?
It has conditional rights to receive consideration because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer.
What is an unconditional contract asset?
It has unconditional rights to receive consideration because the company has satisfied its performance obligation with a customer.
What could be the two journal entries for a conditional contract asset?
- first performance obligation
DR: Contract Asset
CR: Sales Revenue (allocation price of first PO) - second performance obligation
DR: AR
CR: Contract Asset (amount from the first JE)
CR: Sales Revenue (allocation price of second PO)
What could be the journal entries for an unconditional contract asset?
DR: Cash
CR: Unearned Sales Revenue (PO is not satisfied)
(Customer paid in advance)
DR: Unearned Sales Revenue (PO is satisfied)
CR: Sales Revenue
DR: COGS
CR: Inventory
What is contract modification?
when companies change the contract terms while it is ongoing.
What do companies need to determine in a contract modification?
Whether a new contract (and performance obligations) results (a new and separate contract) or whether it is a medication of the existing contract
What two conditions have to be met to be considered a new contract under contract modification?
- The promised goods/services are distinct (the company sells them separately and they are not interdependent with other goods/services.
- The company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods/services.
What is collectibility?
It refers to a customer’s credit risk. The risk that a customer will be unable to pay the amount of consideration in accordance with the contract.
What do disclosures help with on the financial statements?
To help the users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
What are the 5 different types of disclosures?
- Disaggregation of revenue
- Reconciliation of contract balances
- Remaining performance obligations
- Costs to obtain or fulfill contracts
- Other qualitative disclosures
