Homework Answers
a. Performance obligations are the important/ major promises to be delivered as per the conditions of the contract , at the specified time as mentioned in contract.
Here there are 3 Performance obligations in the contract:
1. Supply of software
2. Supply of technical support for 5 years
3. supply of expected major software upgrade on July 1, 2019
The number of Performance obligations in this contract is 3
b. The total contract price is $ 18,457
Individual prices of components are:
Software = $ 7,567
Technical support = $ 7,752
Upgrade : $ 7,198
Contract revenue will be allocated to individual items based on the ratio of their individual prices
Allocation of Contract revenue for an item = Total contract revenue * ( Individual price of item / Sum of Individual prices of all the items )
Allocation of Contract revenue for Software = $ 18,457 * ($ 7,567 / ( 7,567 + 7,752 + 7,198))
= $ 6,202.61
The amount of revenue that P will recognize for the software on July 1, 2016 is $ 6,202.61
c. Allocation of Contract revenue for technical support = $ 18,457 * ($ 7,752 / ( 7,567 + 7,752 + 7,198))
= $ 6,354.25
The total amount of revenue that P will recognize for technical support, ratably over 5 years is $6,354.25
d. Allocation of Contract revenue for software upgrade = $ 18,457 * ($ 7,198 / ( 7,567 + 7,752 + 7,198))
= $ 5,900.14
The amount of revenue that P will recognize for the software upgrade on July 1, 2019 is $ 5,900.14
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The Five-Step Revenue Recognition Model
A.
Step 1: Identify the Contract(s) with a Customer
B.
Step 2: Identify the Performance Obligations in the Contract
C.
Step 3: Determine the Transaction Price
D.
Step 4: Allocate the Transaction Price to the Performance
Obligations in
the Contract
E.
Step 5: Recognize Revenue When (or as) the Entity Satisfies
a
Performance Obligation
F.
Practical Expedients in Applying the Model
G.
Applying the Model to Contract Modifications
C3-1 Applying the 5-step model (LO 3-1)...
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The Five-Step Revenue Recognition Model
A.
Step 1: Identify the Contract(s) with a Customer
B.
Step 2: Identify the Performance Obligations in the Contract
C.
Step 3: Determine the Transaction Price
D.
Step 4: Allocate the Transaction Price to the Performance
Obligations in
the Contract
E.
Step 5: Recognize Revenue When (or as) the Entity Satisfies
a
Performance Obligation
F.
Practical Expedients in Applying the Model
G.
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