Accounting case

Question 1

Under the provision of ASC 606-10, when a contact between a client and a customers is being incepted, the entity should take an assessment of goods and services that are promised in the contract with that particular contract and should recognise as performance obligation every promise that is to be transferred to the customer as either (Delloite,1)

1. As good or service or (their bundles) that is distinct. A situation where each unique good or service promised to be transferred by the entity becomes a performance obligation (PwC, 57).
2. AS a series of separate goods or services. This would be a situation where an entity will provide these goods or services repeatedly over a period of time. These items will then become one performance obligation if they form similar transfer pattern to the customer (PwC, 57).

Hence there exist the two scenarios in this contract and thus forming two performance obligations. One obligation involves the entity promise to transfer the assembly line system to the customer. The assembly line consists of a mixture segment, the moulding segment and the packaging segment. In this situation the customer will not benefit from the delivery of mixer and moulding components without the packaging component thus making this a single performance obligation part of the contract -ASC 606-10-25-19- (PwC,67). That, is each segment of the assembly cannot provide stand-alone benefit to the customer. The other performance obligation is where the entity promise to install the whole system for the customer. It is a separate performance obligation because, in the case EWI company is not able to install the whole system, and CRL Company can source the installation service from other companies but at a cost.

Question 2

FASB ASC 606-10-32-32 provides that the standalone price is the selling price at which a given entity would sell goods or services to a customer separately. The determination of standalone price must be done at the outset of the performance obligation of the contract and should not include an update of that will reflect changes happening between the inception of the contract and the completion of the performance, the only exception being contract modifications. The management should consider all available information, for example competitors pricing, and then maximize noticeable inputs while determining the approach to be used. The method to be used is supposed to be applied consistently in similar circumstances and should consist of all available information that is reasonable, including the conditions in the market and the specific factors that relate to the entity and the customer (PWC, 67).

 EWI does not provide the installation service and thus it needs to make an estimate of standalone price of installation. However, the price of $36,000 cannot be used to determine this estimation since the competitors pricing keeps changing, considering that the pricing without installation fluctuate between $270,000 and $294,000. There is the possibility of the entity recognising more revenue if the market factors allow the standalone price to be revised upward, such as technicians’ charges and the overall economy. The standalone price can, on the other hand be determined by adjusted market assessment technique, where the estimation is made of the price that would be paid by customers for the good or service from the entity. The other approach to estimate the standalone price is through adding a margin to the expected cost that will cater for performance obligation. The third one is the residual approach, where the price estimation is done by adding up the observable standalone selling price from the transaction price of the system (Delloite, 1).

Question 3

FASB ASC 606-10-32-36 provides that the allocation of transaction price to each performance obligation by an entity is done on the basis of relative standalone selling prices for every unique good or service promised in a contract. A customer may receive a discount for buying a bundle of goods and services if the total of standalone selling prices of the promised goods or services as per the contract is more than the contract’s promised consideration. The allocation of the discount to all performance obligations is arranged based on obligation’s relative standalone selling prices, such that the allocation of discounts to all performance obligation is done proportionately (Delloite, 1). In this case the customer does not receive any discount. Therefore the transaction price is allocated to the assembly line service and the installation service given $36,000 as the standalone selling price for installation service and the standalone price of the assembly line system being $285,000.

 

Transaction	Price	Total
Assembly	285000	(285,000/321,000)x 300,000=266355.14
Installation	36000	(36,000/321,000)x300000=33644.86
Total	321000	300000

 

Question 4

In accordance with FASB ASC 606-10-25-23, recognition of revenue occurs when the control of a good or service moves from the entity to the customer or rather when the entity transfers the promised good or service- an asset- to the customer and thus satisfying the performance obligation. This theory of transferring the control of goods and services is in line with authoritative guidance in the asset definition. It might seem to refer only to transfer of goods but it also refers to the transfer of the service to the customer even if the service is immediately consumed. A customer gains the control of the good or service if they are capable of directing the use of such and gets almost all the remaining benefits from the goods or service. A customer may have the right in future to direct the use the goods and services and also obtain almost all the benefits arising from such but they should have actually obtained those rights for transfer of control to have taken place. Directing the use means a customer’s right to deploy good, allowing its deployment by another entity or putting restrictions for another entity not to use it (PwC, 67).

For revenue to be recognized and thus the entity to have satisfied the performance obligation, the criteria to be met include: the customer receiving and consuming the benefits arising from the entity’s performance process at the same time; the performance of the entity creating or enhancing an asset already in the customer’s control or the performance of the entity does not create an asset which has an alternative use to the entity and the entity  has a right to be paid for the performance completed (PwC,67). The above two performance obligations do not meet the criteria and therefore they both do not recognise revenue at some point in time. The EWI entity delivers the assembly line systems at separate points in time. It first delivers the mixer and the moulding segments and plans to deliver the packaging component in future. However, the customer cannot put into use the other segments without the packaging segment and as such the control of the asset has not fully passed from the entity to the customer and hence no revenue has been recognised. Thus until the entity delivers the whole system to the customer it will not recognise any revenue. In the second obligation of delivering the installation service to the customer, the entity has not yet recognised revenue and it will do so after it has performed the obligation of the contract and therefore pass on the control of the service to the customer. This simply means that the customer is not able to receive and consume the benefits of the delivery service at the same time and the service deliver does not meet the above mentioned criteria.

 

Question 5

1. a) During the quarter ending March 31, 2016, EWI has received $210,000 as unearned revenue for moulding and mixing segments. It is unearned revenue because at that time though the entity had delivered the two segments of the assembly line, that is, the moulding and the mixing segment, it has not has not yet delivered the packaging segment. The segments cannot be used separately and thus until the packaging has been delivered the control of the asset has not been passed on from the entity to the customer, thus the received payment is a liability.

Journal entry

March 20, 2016		Amount	Amount
	Cash	210,000
	Unearned revenue		210,000

 

1. b) For the quarter ending June 30, 2016, EWI has received $ 60,000 from the customer on May 26, 2016 which is an unearned revenue since the entity has not delivered the packaging segment of the system. This is thus a liability to the entity.

Journal entry

May 26, 2016		Amount	Amount
	Cash	60,000
	Unearned revenue		60,000
	Cash	266370
	Sales revenue		266370
	Cash	33630
	Unearned revenue		33630

 

1. c) In the quarter ending September 30, 2016 the installation service has been delivered by the entity to the customer on July 1, 2016 as promised. Thus the entity has satisfied the performance obligation as per the promise which means that it has recognized revenue.

Journal entries

July1, 2016
	Cash	30,000
	Sales revenue		30,000

 

 

Question 6

The other approach to use in estimating the standalone price is the residue approach. According to ASC 606-10-32, while using this approach, the estimation of standalone price should be done by subtracting the sum of all standalone selling price of the other promised goods and services from the price of transaction. For this approach to be used, the following criteria has to be met (Delloite, 1).

• There should exist a wide-ranging current selling prices to some other customers , meaning that a representative standalone selling price is not available
• There is no specific price for goods and services and the sale of such goods and services has never been done (Delloite, 1).

In this case, the entity has not previously sold the installation service separately on the basis of a standalone selling price. This means that the stand alone price unknown or uncertain. Thus, the stand alone selling price will be determined as follows.

 

Total price                                                                                      300000

Standalone price of transaction- Assembly line                     (285,000)

Standalone installation service price                                         $ 15,000

 

1. For quarter ending March 31, 2016, CRL had actually paid $210 000 for the mixture and moulding segment but the performance obligation had not been satisfied because the packaging was not delivered. This means that no revenue had been recognized and thus $210,000 will still be a liability. The revenue should have been recognized if all segments were delivered by 31^st
2. The quarter ending June 30, 2016, the entity had delivered the packaging segment to CRL which had paid $60,000 for it. Thus all the system’s segments had been delivered thereby satisfying the performance obligation. EWI recognised a revenue of $285,000 by the end of that quarter, but only received $270,000 (210,000+60,000) and the remaining $15,000 (285,000-270,000) is debited to the account receivable.

 

June 30,2016		Amount	Amount
	Cash	60,000
	Unearned revenue	210,000
	Account receivable	15,000
	Sales		285,000

 

1. For the quarter ending September 30, 2016, CRL had paid $30,000 for installation on 1^st July, and EWI had promised to deliver the installation service on the same day. Thus EWI had satisfied the performance obligation and thus recognised a revenue of $15,000 by the end of the quarter.

September 30, 2016
	Cash	15,000
	Account receivable		15,000

 

 

 

 

Works cited

Delloite. ASC 606 — Revenue from Contracts with Customers. 2016.1. Retrieved from: http://www.iasplus.com/en-us/standards/fasb/revenue/asc606.

PwC. Revenue from contracts with customers, 2016.53-67. Retrieved from: https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-revenue-recognition-global-guide-2014.pdf