Revenue Recognition

Question 1

5-step process for revenue recognition

Answer 1

1. Identify contracts
2. Identify separate performance obligations
3. Determine the total consideration for the contract
4. Allocate the total consideration among separate performance obligations
5. Recognize revenue either when the entity has satisfied its performance or is satisfying its performance

Question 2

Assurance type warranty

Answer 2

Represents contingent liability; accrued in the period incurred – general the period of sale

“Warranty expense
Estimated warranty liability”

Question 3

Service type warranty

Answer 3

Separately identifiable promise; a distinct performance obligation “deferred revenue - warranty”

Question 4

Discounts

Answer 4

If available to everyone->no value

If more than what is available to everyone-> distinct performance obligation

Question 5

How do you treat a discount that is unique to buyer?

Answer 5

Difference between discount for everyone and the unique one TIMES avg money spent

Then allocate that.

Cash
Revenue
Deferred revenue

Deferred gets hit over time

Question 6

Variable consideration

Answer 6

Estimated at inception-

Expected value approach: each amount is multiplied by the probability of achieving it and the total is the expected amount of variable consideration

Most likely amount approach

Question 7

How to find the standalone selling price when it is not known

Answer 7

Adjusted market assessment approach
->evaluate the market, see what customers might be willing to pay/look at competitors
Expected cost plus a margin approach
->forecast expected costs and add an appropriate profit margin for that good or service

May only use residual value method approach if either

• > some goods or services are sold for different amounts to different customers
• > the good or service not previously been sold as a standalone product or service and a price has not been set yet