PROBLEM 2

1. REQUIRED: Does the contract qualify for revenue recognition on contract inception?
The assessment on the contract in regards to its criterion isn’t met, simply for the reason that
the contracting entity has no other method to receive the consideration, therefore, it is probable
and has the high chance in my opinion that the building will not be compensated with a
consideration. In other words, no contract is established.
a. Although the customer paid 50k initially, for legal purposes, the down payment for the
building isn’t enough, as it is needed to be 25%. Thus, the customer having a large
balance can be seen as a liability.
b. He has no other collateral, nor any other asset stated in the problem to pay for the
building,
c. The loan is non-recourse, meaning the customer liability is limited.
d. In, conclusion, contract is subject to reassessment and has to be reviewed.
2. REQUIRED: Is the maintenance service a performance obligation? If yes, is it an explicit
promise or an implicit promise?
Yes, and it is an Implicit promise. There is a specified arrangement to transfer the the goods and
services to another party, i.e outsourced customers.
3. REQUIRED: Is the maintenance service a performance obligation? If yes, is it an explicit
promise or an implicit promise?
In assessing the maintenance service whether it is a performance obligation or not, the answer
is No. The product must be distinct and identified, in other words, the outsource product can be
generically maintenance by other distributor of kind, furthermore, the identifiable of product is
in a large gray area as well as the implicitly stated obligation, whether if it can be compelled to
do so or not. Also there is no arrangement to transfer the product to third party outside the
contracting parties.
4. REQUIRED: Is the maintenance service a performance obligation? If yes, is it an explicit
promise or an implicit promise?
No, although it is explicitly stated that the business customary practices of maintenance is not in
accordance to their normal operation. Furthermore, it is immaterial in the expected revenue in
the contract, thus, not a performance obligation

5. REQUIRED: Allocate the transaction price to the performance obligations.

PRODUCT STAND ALONE ALLOCATION ALLOCATED

SELLING PRICE
 PRODUCT A 50 100 x 50/150 33.33 Directly
Observable
PRODUCT B 25 100 x 25/150 16.67 Adjusted
market
assessment
approach
PRODUCT C 75 100 x 75/150 50 Expected cost
plus markup
of 50%
TOTAL 150 100

6. REQUIRED: IDENTIFY IF THE PERFORMANCE OBLIGATION IS SATISFIED OVER TIME OR AT A

POINT IN TIME. STATE HOW THE ENTITY RECOGNIZE REVENUE
- an entity recognizes revenue over time if the customer simultaneously
receives and consumes the benefits provided by the entity's performance as
the entity performs. Thus the in the case above it recognizes revenue OVER
TIME
- the other consulting firm would need to substantially re-perform the work
that the entity had completed to date, because the other consulting firm
would not have the benefit of any work in progress performed by the entity.
The nature of the professional opinion is such that the customer will receive
the benefits of the entity’s performance only when the customer receives
the professional opinion.

7. REQUIRED: SOLUTION

ASSET EXPENSE
Design Service (400k x 6/7) 34,285.71
Amortization Design (400k/7) 5,714.29
Hardware (120k x 4/5) 96,000
Depreciation- Hardware (120k/5) 24,000
Software (90k x 4/5) 72,000
Amortization- Software (90k/5) 18,000
Migration and Testing- Data Center (100k x 6/7) 85,714.29
Amortization of Migration and Testing – Data Center 14,285.71
Employee Benefits 30,000
288,000 92,000
8. REQUIRED: JOURNAL ENTRIES

Date PARTICULARS DEBIT CREDIT

01/01/20x No entry
8
01/03/20x Contract Asset (1k x 480/ 1.2k) 400
8 Revenue 400
03/31/20x Receivable 1,000
8 Contract Asset 400
Revenue (1kx 720/1.2k) 600
04/08/20x CASH 1,000
8 Receivable 1,000

9.

10.

Date PARTICULARS DEBIT CREDIT

CASH 10,000
REVENUE 9,700
LIABILITY (REFUND) 300
COST OF GOODS SOLD 5,820
RECOVERIES 180
INVENTORY 6,000