Revenue Recognition

Question 1

Five Step Process for contracts rev rec

Answer 1

1. ID contract with customer
2. ID performance obligations in contract
3. Determine transaction price
4. Allocate transaction price to the performance obligations in the contract
5. Recognize revenue when or as the entity satisfies a performance obligation

Question 2

Expected Value Method

Answer 2

The sum of probability weighted amounts in a range of possible consideration amounts. This method appropriate when an entity has a large number of contracts with similar characteristics.

Question 3

Most Likely Amount Method

Answer 3

The single most likely amount in a range of possible consideration amounts; the single most likely outcome of the contract. This method is appropriate when the contract has only two possible outcomes: an entity either achieves a performance bonus or does not.

Question 4

Required criteria for revenue recognition model to be applies

Answer 4

1. Parties to contract have approved the contract and are committed to perform their respective obligations
2. The entity can identify each party’s rights regarding the goods or services to be transferred
3. The entity can identify the payment terms for the goods and services to be transferred
4. The contract has commercial substance
5. It is probable the entity will collect the consideration to which it is entitled in exchange for the goods or services transferred to the customers

Question 5

Residual approach

Answer 5

Estimates standalone selling price by referencing the total transaction price less the sum of observable standalone prices of other goods and services in the contract