240 SECTION 1 The Role of Accounting as an Information System Illustration 5–11 Summary of Fundamental Issues Related to Recognizing Revenue Revenue Recognition Fundamental Issues Concept Review Exercise REVENUE RECOGNITION FOR CONTRACTS WITH MULTIPLE PERFORMANCE OBLIGATIONS A contract establishes the legal rights and obligations of the seller and customer with respect to one or more performance obligations. A performance obligation is a promise to transfer a good or service that is distinct, which is the case if the good or service is both (a) capable of being distinct and (b) separately identifiable. The transaction price is the amount the seller is entitled to receive from the customer. Macrovision sells a variety of satellite TV packages. The popular $600 Basic Package includes a hardware component (consisting of a satellite dish and receiver) along with a twelve-month subscription to 130 TV channels. Macrovision sells the hardware component without a subscription for $180, and sells a twelve-month subscription to the same 130 channels without hardware for $540/year. Let’s account for the sale of one Basic Package for $600 on January 1, 2016. Required: 1. Identify the performance obligations in the Basic Package contract, and determine when revenue for each should be recognized. 2. For the single Basic Package sold on January 1, 2016, allocate the $600 transaction price to the performance obligations in the contract, and prepare a journal entry to record the sale (ignoring any entry to record the reduction in inventory and the corresponding cost of goods sold). 3. Prepare any journal entry necessary to record revenue related to the same contract on January 31, 2016. Solution: 1. Identify the performance obligations in the Basic Package contract, and determine when revenue for each should be recognized. The hardware component and the twelve-month subscription are capable of being distinct (they are sold separately) and are separately identifiable (the hardware and services are not highly intertwined so it makes sense to consider them separately). Therefore, the hardware component and the twelve-month subscription are distinct from each other and should be treated as separate performance obligations. Revenue for Step 1 Identify the contract The seller allocates the transaction price to performance obligations based on the relative stand alone selling prices of the goods or services in each performance obligation. Step 2 Identify the performance obligation(s) Step 3 Determine the transaction price Step 4 Allocate the transaction price Step 5 Recognize revenue when (or as) each performance obligation is satisfied The seller recognizes revenue at a single point in time when control passes to the customer, which is more likely if the customer has: ���������������������������������������������������������������� �������������������������������������������������������� ������������������������������������������������������ ���������������������������������������������������������������������� ownership. �������������������������������������������� The seller recognizes revenue over a period of time if: �������������������������������������������������������������� work performed, ���������������������������������������������������������������������� created, or ������������������������������������������������������������������������������ no alternative use and the seller has right to receive payment for work completed.
Spiceland_Inter_Accounting8e_Ch05
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