Professional Documents
Culture Documents
ch18 Pengakuan Pendapatan
ch18 Pengakuan Pendapatan
Coby Harmon
University of California, Santa Barbara
Westmont College
18-1
CHAPTER 18
Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand the fundamental 3. Apply the five-step process to
concepts related to revenue major revenue recognition
recognition and measurement. issues.
2. Understand and apply the 4. Describe presentation and
five-step revenue recognition disclosure regarding revenue.
process.
18-2
PREVIEW OF CHAPTER 18
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
18-3
LEARNING OBJECTIVE 1
Fundamentals of Understand the fundamental
concepts related to revenue
Revenue Recognition recognition and measurement.
Background
Both the IASB and the FASB have indicated that the
state of reporting for revenue was unsatisfactory.
18-4 LO 1
Revenue Recognition
18-6
Performance Obligation is Satisfied LO 1
Overview of the Five-Step Process
18-7 LO 1
Overview of the Five-Step Process
18-8 LO 1
Overview of the Five-Step Process
Step 5: Recognize
Airbus recognizes revenue of €100 million for the
revenue when
sale of the airplanes to Cathay Pacific when it
each performance
satisfies its performance obligation—the delivery
obligation
of the airplanes to Cathay Pacific.
is satisfied.
18-9 LO 1
Extended Example of Five-Step Process
18-10 LO 1
Extended Example of Five-Step Process
1. The contract has commercial substance: Tyler gives cash for the
coffee.
2. The parties have approved the contract: Tyler agrees to purchase
the coffee and BEAN agrees to sell it.
3. Identification of the rights of the parties is established: Tyler
has the right to the coffee and BEAN has the right to receive $3.
4. Payment terms are identified: Tyler agrees to pay $3 for the
coffee.
5. It is probable that the consideration will be collected: BEAN
has received $3 before it delivered the coffee.
18-11 It appears that BEAN and Tyler have a valid contract with one another.
LO 1
Extended Example of Five-Step Process
18-12 LO 1
Extended Example of Five-Step Process
18-14 LO 1
Extended Example of Five-Step Process
BEAN must determine whether the sale of the coffee and the sale of
the two bagels involve one or two performance obligations.
18-15 LO 1
Extended Example of Five-Step Process
18-17 LO 1
Extended Example of Five-Step Process
18-18 LO 1
Extended Example of Five-Step Process
18-19 LO 1
Extended Example of Five-Step Process
18-20 LO 1
Step 3: Determine the transaction price.
18-22 LO 1
Extended Example of Five-Step Process
The bag of Motor Moka beans and the large cup of coffee are
distinct from one another and are not highly dependent on or highly
interrelated with the other.
18-23 LO 1
Extended Example of Five-Step Process
18-24 LO 1
Extended Example of Five-Step Process
18-26 LO 1
Extended Example of Five-Step Process
18-27 LO 1
LEARNING OBJECTIVE 2
The Five-Step Understand and apply the five-
step revenue recognition
Process Revisited process.
◆ Can be
► written,
► oral, or
► implied from customary business practice.
18-28 LO 2
Contract with Customers—Step 1
Accounting
◆ Revenue cannot be recognized until a contract exists.
18-29 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
The journal entry to record the sale and related cost of goods sold is as follows.
July 31, 2019
Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 3,000
Inventory 3,000
18-30 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
Margo makes the following entry to record the receipt of cash on August 31, 2019.
August 31, 2019
Cash 5,000
Accounts Receivable 5,000
18-31 LO 2
Separate Performance Obligations—Step 2
18-32 LO 2
Separate Performance Obligations—Step 2
ILLUSTRATION
18-33 LO 2
Separate Performance Obligations—Step 2
ILLUSTRATION
18-34 LO 2
Determining Transaction Price—Step 3
Transaction price
◆ Amount of consideration that company expects to receive
from a customer.
Variable Consideration
◆ Price dependent on future events.
► May include price increases, volume discounts,
rebates, credits, performance bonuses, or royalties.
18-36 LO 2
Determining Transaction Price—Step 3
Most Likely Amount: The single most likely amount in a range of possible
consideration outcomes.
▪ May be appropriate if the contract has only two possible outcomes.
18-37 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
18-38 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
Most likely outcome, if management believes they will meet the deadline
and receive the $50,000 bonus, the total transaction price would be?
18-39 LO 2
Variable Consideration
18-41 LO 2
ILLUSTRATION 18.7
Time Value of Money Transaction Price -
Extended Payment Terms
Questions: (a) How much revenue should SEK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
18-42 LO 2
ILLUSTRATION 18.12
Time Value of Money Transaction Price -
Extended Payment Terms
Questions: (a) How much revenue should SEK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
Entry to record interest revenue at the end of the year, December 31, 2019.
Notes Receivable 54,000
Interest Revenue (12% x ½ x R$900,000) 54,000
Companies are not required to reflect the time value of money if the time period
for payment is less than a year.
18-43 LO 2
Determining Transaction Price—Step 3
Non-Cash Consideration
Goods, services, or other non-cash consideration.
◆ Companies sometimes receive contributions (e.g.,
donations and gifts).
18-44 LO 2
Determining Transaction Price—Step 3
18-45 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
VOLUME DISCOUNT
Facts: Sansung Company offers its customers a 3% volume discount if they
purchase at least ¥2 million of its product during the calendar year. On March 31,
2019, Sansung has made sales of ¥700,000 to Artic Co. In the previous 2 years,
Sansung sold over ¥3,000,000 to Artic in the period April 1 to December 31.
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
18-46 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
Cash 679,000
Accounts Receivable 679,000
If Sansung’s customer fails to meet the discount threshold, Sansung makes the
following entry upon payment.
Cash 700,000
Accounts Receivable 679,000
Sales Discounts Forfeited 21,000
18-47 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4
18-48 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4 ILLUSTRATION 18.9
Transaction Price—
Allocation
18-49 LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-50 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-51 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-52 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-53 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-54 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-55 (continued) LO 2
ILLUSTRATION 18.12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
Handler recognizes revenue from the sale of the equipment once the
installation is completed on November 1, 2019. In addition, it recognizes
revenue for the installation fee because these services have been
performed.
18-56 (continued) LO 2
ILLUSTRATION 18-12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-57 (continued) LO 2
ILLUSTRATION 18-12
Allocating Transaction Price Multiple Performance
Obligations—Product,
Installation, and Service
18-58 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5
Company satisfies its performance obligation when the
customer obtains control of the good or service.
18-59 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5
Recognizing revenue from a performance obligation over
time
◆ Measure progress toward completion
18-60 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-61 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
18-62 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-63 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
4. Allocate the If more than one The best measure of fair value
transaction performance obligation is what the good service could
price to the exists, allocate the be sold for on a standalone
separate transaction price based basis (standalone selling price).
performance on relative fair values. Estimates of standalone selling
obligation. price can be based on
1. adjusted market
assessment,
2. expected cost-plus a margin
approach, or
ILLUSTRATION 18.15 3. a residual approach.
Summary of the
Five-Step Revenue
Recognition Process
18-64 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
18-65 LO 2
LEARNING OBJECTIVE 3
Accounting for Revenue Apply the five-step process to
major revenue recognition
Recognition Issues issues.
◆ Repurchase agreements
◆ Bill and hold
◆ Principal-agent relationships
◆ Consignments
◆ Warranties
◆ Non-refundable upfront fees
18-66 LO 3
Sales Returns and Allowances
18-67 LO 3
Credit Sales with Returns and Allowances
Illustration: Assume that on January 12, 2019, Venden NV sells 100
cameras for €100 each on account to Amaya SA. Venden allows
Amaya to return any unused cameras within 45 days of purchase. The
cost of each product is €60. Venden estimates that:
18-69 LO 3
Credit Sales with Returns and Allowances
Venden originally estimated that the most likely outcome was that
three cameras would be returned. Venden believes the original
estimate is correct and makes the following adjusting entries to
account for expected returns at January 31, 2019.
18-70 LO 3
Credit Sales with Returns and Allowances
Venden’s income statement for the month of January.
ILLUSTRATION 18.16
ILLUSTRATION 18.17
18-71 LO 3
Cash Sales with Returns and Allowances
Illustration: Assume now that on January 12, 2019, Venden NV sells
100 cameras for €100 each for cash to Amaya SA. Venden allows
Amaya to return any unused cameras within 45 days of purchase. The
cost of each product is €60. Venden estimates that:
18-73 LO 3
Credit Sales with Returns and Allowances
On January 31, 2019, Venden prepares financial statements. As
indicated earlier, Venden estimates that the most likely outcome is that
one more camera will be returned. Venden therefore makes the
following adjusting entries.
18-74 LO 3
Credit Sales with Returns and Allowances
Venden’s income statement for the month of January.
ILLUSTRATION 18.18
ILLUSTRATION 18.19
18-75 LO 3
Repurchase Agreements
18-76 LO 3
ILLUSTRATION 18.20
Repurchase Agreements Recognition—Repurchase
Agreement
REPURCHASE AGREEMENT
Facts: Morgan Ltd., an equipment dealer, sells equipment on January 1,
2019, to Lane Company for £100,000. It agrees to repurchase this
equipment (an unconditional obligation) on December 31, 2020, for a price
of £121,000.
Cash 100,000
Liability to Lane Company 100,000
18-77 LO 3
ILLUSTRATION 18.22
Repurchase Agreements Recognition—Repurchase
Agreement
18-78 LO 3
Bill-and-Hold Arrangements
18-79 LO 3
Bill-and-Hold Arrangements ILLUSTRATION 18.21
Recognition—Bill and Hold
18-80 LO 3
Bill-and-Hold Arrangements ILLUSTRATION 18.23
Recognition—Bill and Hold
In this case, it appears that the above criteria were met, and therefore
revenue recognition should be permitted at the time the contract is signed.
18-81 LO 3
Bill-and-Hold Arrangements ILLUSTRATION 18.23
Recognition—Bill and Hold
March 1, 2019
Butler makes the following entries to record the bill-and-hold sale and
related cost of goods sold.
Accounts receivable 450,000
Sales Revenue 450,000
Cost of Goods Sold 280,000
Inventory 280,000
18-82 LO 3
Principal-Agent Relationships
◆ Principal’s performance obligation is to provide goods or
perform services for a customer.
◆ Agent’s performance obligation is to arrange for principal to
provide goods or services to a customer.
◆ Examples:
► Preferred Travel Company (agent) facilitates the booking
of cruise excursions by finding customers for Regency
Cruise Company (principal).
► Priceline (USA) (agent) facilitates the sale of various
services such as car rentals at Hertz (USA) (principal).
18-83 LO 3
Consignments
18-84 LO 3
ILLUSTRATION 18.23
Consignments Recognition—Sales on
Consignment
18-85 LO 3
ILLUSTRATION 18.23
18-86 LO 3
ILLUSTRATION 18.23
18-87 LO 3
ILLUSTRATION 18.23
18-88 LO 3
ILLUSTRATION 18.25
Consignments Recognition—Sales on
Consignment
18-89 LO 3
Warranties
18-90 LO 3
ILLUSTRATION 18.26
Warranties Performance Obligations
and Warranties
WARRANTIES
Facts: Maverick Company sold 1,000 Rollomatics on October 1, 2019, at
total price of $6,000,000, with a warranty guarantee that the product was
free of defects. The cost of the Rollomatics is $4,000,000. The term of this
assurance warranty is 2 years, with an estimated cost of $80,000. In
addition, Maverick sold extended warranties related to 400 Rollomatics for 3
years beyond the 2-year period for $18,000. On November 22, 2019,
Maverick incurred labor costs of $3,000 and part costs of $25,000 related to
the assurance warranties. Maverick prepares financial statements on
December 31, 2019. It estimates that its future assurance warranty costs will
total $44,000 at December 31, 2019.
October 1, 2019
To record the sale of the Rollomatics and the related extended warranties:
Cash ($6,000,000 + $18,000) 6,018,000
Sales Revenue 6,000,000
Unearned Warranty Revenue 18,000
To record the cost of goods sold and reduce the inventory of Rollomatics:
18-92 LO 3
ILLUSTRATION 18.24
Warranties Recognition—Performance
Obligations and Warranties
To record the adjusting entry related to its assurance warranty at year end:
Warranty Expense 44,000
Warranty Liability 44,000
18-93 LO 3
Non-Refundable Upfront Fees
18-94 LO 3
LEARNING OBJECTIVE 4
Presentation and Disclosure Describe presentation and
disclosure regarding
revenue.
Presentation
Contract Assets and Liabilities
◆ Contract assets are of two types:
1. Unconditional rights to receive consideration
because company has satisfied its performance
obligation.
18-95 LO 4
ILLUSTRATION 18.27
Presentation Contract Asset Recognition
and Presentation
CONTRACT ASSET
Facts: On January 1, 2019, Finn ASA enters into a contract to transfer
Product A and Product B to Obermine Overstock for €100,000. The contract
specifies that payment of Product A will not occur until Product B is also
delivered. In other words, payment will not occur until both Product A and
Product B are transferred to Obermine. Finn determines that standalone
selling prices are €30,000 for Product A and €70,000 for Product B. Finn
delivers Product A to Obermine on February 1, 2019. On March 1, 2019,
Finn delivers Product B to Obermine.
18-96 LO 4
ILLUSTRATION 18.27
Presentation Contract Asset Recognition
and Presentation
18-97 LO 4
ILLUSTRATION 18.28
Presentation Contract Liability Recognition
and Presentation
CONTRACT LIABILITY
Facts: On March 1, 2019, Henly Company enters into a contract to transfer
a product to Propel Inc. on July 31, 2019. It is agreed that Propel will pay the
full price of $10,000 in advance on April 1, 2019. The contract is non-
cancelable. Propel, however, does not pay until April 15, 2019, and Henly
delivers the product on July 31, 2019. The cost of the product is $7,500.
18-98 LO 4
ILLUSTRATION 18.28
Presentation Contract Liability Recognition
and Presentation
On receiving the cash on April 15, 2019, Henly records the following entry.
Cash 10,000
Unearned Sales Revenue 10,000
Contract Modifications
◆ Change in contract terms while it is ongoing.
◆ Companies determine
► whether a new contract (and performance
obligations) results or
18-100 LO 4
Contract Modifications
18-101 LO 4
Separate Performance Obligation
18-102 LO 4
Contract Modifications
Prospective Modification
◆ Company should
18-103 LO 4
Prospective Modification
18-104 LO 4
Prospective Modification
ILLUSTRATION 18.30
Comparison of Contract Modification Approaches
18-105 LO 4
Presentation
18-106 LO 4
Presentation
Collectibility
◆ Credit risk that a customer will be unable to pay in
accordance with the contract.
18-107 LO 4
Disclosure
◆ Significant judgments.
18-108 LO 4
Disclosure
18-109 LO 4
APPENDIX 18A Long-Term Construction Contracts
LEARNING OBJECTIVE 5
Apply the percentage-of-completion method for long-term contracts.
18-110 LO 5
Revenue Recognition Over Time
18-111 LO 5
Revenue Recognition Over Time
18-112 LO 5
Revenue Recognition Over Time
18-113 LO 5
Revenue Recognition Over Time
18-114 LO 5
Revenue Recognition Over Time
Percentage-of-Completion Method
Measuring the Progress Toward Completion
Most popular input measure used to determine the progress
toward completion is the cost-to-cost basis.
18-115 LO 5
Percentage-of-Completion Method
ILLUSTRATION 18A.2
ILLUSTRATION 18A.3
18-116 LO 5
Percentage-of-Completion Method
18-117 LO 5
Percentage-of-Completion Method
2019 2020 2021
ILLUSTRATION 18A.4
Application of Percentage-of-
Completion Method, Cost-to-
18-118 Cost Basis LO 5
Percentage-of-Completion Method
2019 2020 2021
18-119 LO 5
Percentage-of-Completion Method
2019
2020
2021
18-120 LO 5
ILLUSTRATION 18A.6
Percentage-of- 2019
Completion
Method 2020
2021
18-121 LO 5
Percentage-of-Completion Method
18-122 LO 5
Percentage-of-Completion Method
ILLUSTRATION 18A.9
18-123 LO 5
Percentage-of-Completion Method
18-124
Percentage-of-Completion Method
18-125
Percentage-of-Completion Method
18-126 LO 5
APPENDIX 18A Long-Term Construction Contracts
18-127 LO 6
Cost-Recovery (Zero-Profit) Method
2019
2020
2021
18-128 LO 6
ILLUSTRATION 18A.14
Cost-Recovery Method Revenue,
Costs, and Gross Profit by Year
ILLUSTRATION 18A.15
Journal Entries—Cost-Recovery Method
18-129 LO 6
ILLUSTRATION 18A.14
Cost-Recovery Method Revenue,
Costs, and Gross Profit by Year
ILLUSTRATION 18A.16
Comparison of Gross Profit Recognized under Different Methods
18-130 LO 6
ILLUSTRATION 18A.17
Financial Statement Presentation—Cost- Recovery Method
18-131 LO 6
APPENDIX 18A Long-Term Construction Contracts
Prepare the journal entries to record revenue and expense for 2018, 2019, and
2020 assuming the estimated cost to complete at the end of 2019 was
$215,436.
18-133 LO 7
Loss in Current Period
2014
2018 2015
2019 2016
2020
Costs incurred to date $ 150,000 $ 437,400 $ 652,836
Estimated cost to complete 450,000 215,436
Est. total contract costs 600,000 652,836 652,836
Est. percentage complete 25.0% 67.0% 100.0%
Contract price 675,000 675,000 675,000
Revenue recognizable 168,750 452,250 675,000
Rev. recognized prior year (168,750) (452,250)
Rev. recognized currently 168,750 283,500 222,750
Costs incurred currently (150,000) (287,400) (215,436)
Gross profit recognized $ 18,750 $ (3,900) $ 7,314
18-134 LO 7
Loss in Current Period
18-135 LO 7
Long-Term Contract Losses
Prepare the journal entries for 2018, 2019, and 2020 assuming the estimated
cost to complete at the end of 2019 was $246,038 instead of $170,100.
18-136 LO 7
Loss on Unprofitable Contract
2014
2018 2015
2019 2016
2020
Costs incurred to date $ 150,000 $ 437,400 $ 683,438
Estimated cost to complete 450,000 246,038
Est. total contract costs 600,000 683,438 683,438
Est. percentage complete 25.0% 64.0% 100.0%
Contract price 675,000 675,000 675,000
Revenue recognizable 168,750 432,000 675,000
Rev. recognized prior year (168,750) (432,000)
Rev. recognized currently 168,750 263,250 243,000
Costs incurred currently (150,000) (290,438) (243,000)
Gross profit recognized $ 18,750 $ (27,188) $ -
18-138 LO 7
Loss on Unprofitable Contract
18-139 LO 7
APPENDIX 18B Revenue Recognition for Franchises
LEARNING OBJECTIVE 8
Explain revenue recognition for franchises.
2. Manufacturer-wholesaler
3. Service sponsor-retailer
4. Wholesaler-retailer
18-140 LO 8
APPENDIX 18B Revenue Recognition for Franchises
18-141 LO 8
APPENDIX 18B Revenue Recognition for Franchises
18-142 LO 8
APPENDIX 18B Revenue Recognition for Franchises
Franchise Accounting
Performance obligations relate to:
18-143 LO 8
Franchise Accounting
18-144 LO 8
FRANCHISE
Facts: Tum’s Pizza Inc. enters into a franchise agreement on November 1,
2019, giving Food Fight Corp. the right to operate as a franchisee of Tum’s
Pizza for 5 years. Tum’s charges Food Fight an initial franchise fee of
$50,000 for the right to operate as a franchisee. Of this amount, $20,000 is
payable when Food Fight signs the agreement, and the balance is payable
in five annual payments of $6,000 each on December 31. Food Fight also
promises to pay ongoing royalty payments of 1% of its annual sales
(payable each January 31 of the following year) and is obliged to purchase
products from Tum’s at its current standalone selling prices at the time of
purchase. The credit rating of Food Fight indicates that money can be
borrowed at 8%. The present value of an ordinary annuity of five annual
receipts of $6,000 each discounted at 8% is $23,957. The discount of
$6,043 represents the interest revenue to be accrued by Tum’s over the
payment period.
18-145 LO 8
What are the performance obligations and the point in time when
the performance obligations are satisfied and revenue is
recognized?
Rights to the trade name, market area, and proprietary know-
how for 5 years are not individually distinct.
◆ Each one is not sold separately and cannot be used with other
goods or services that are readily available to the franchisee.
18-146 LO 8
What are the performance obligations and the point in time when
the performance obligations are satisfied and revenue is
recognized?
Training services and equipment are distinct because similar
services and equipment are sold separately.
◆ Tum’s recognizes revenue for the royalties when (or as) the
uncertainty is resolved.
18-147 LO 8
Franchise Accounting
18-148 LO 8
Franchise Accounting
On December 31, 2019, Tum’s signs the agreement and receives
upfront payment and note.
Cash 20,000
Notes Receivable 23,957
Unearned Franchise Revenue 20,000
Unearned Service Revenue (training) 9,957
Unearned Sales Revenue (equipment) 14,000
18-149 LO 8
Franchise Accounting
On February 2, 2020, franchise opens. Tum’s satisfies the
performance obligations related to the franchise rights, training, and
equipment.
Unearned Franchise Revenue 20,000
Franchise Revenue 20,000
Unearned Service Revenue (training) 9,957
Service Revenue (training) 9,957
Unearned Sales Revenue (equipment) 14,000
Sales Revenue 14,000
Cost of Goods Sold 10,000
Inventory 10,000
18-150 LO 8
Franchise Accounting
During 2020, Food Fight does well, recording $525,000 of sales in its
first year of operations. The entries for Tum’s related to the first year of
operations (December 31, 2020) of the franchise are as follows.
18-152 LO 8
FRANCHISE REVENUE OVER TIME
Facts: As an almost entirely service operation (all parts and other supplies
are purchased as needed by customers), Tech Solvers provides few
upfront services to franchisees. Instead, the franchisee recruits service
technicians, who are given Tech Solvers’ training materials (online manuals
and tutorials), which are updated for technology changes, on a monthly
basis at a minimum. Tech Solvers enters into a franchise agreement on
December 15, 2019, giving a franchisee the rights to operate a Tech
Solvers franchise in eastern Bavaria for 5 years. Tech Solvers charges an
initial franchise fee of $5,000 for the right to operate as a franchisee,
payable upon signing the contract. Tech Solvers also receives ongoing
royalty payments of 7% of the franchisee’s annual sales (payable each
January 15 of the following year). The franchise began operations in
January 2020 and recognized $85,000 of revenue in 2020.
18-154 LO 8
What are the performance obligations and the point in time when
the performance obligations are satisfied and revenue is
recognized?
Rights to the trade name, market area, and proprietary know-how
for 5 years are not individually distinct.
◆ Each one is not sold separately and cannot be used with other
goods or services that are readily available to the franchisee.
18-155 LO 8
What are the performance obligations and the point in time when
the performance obligations are satisfied and revenue is
recognized?
Tech Solvers cannot recognize revenue for the royalty payments
18-156 LO 8
FRANCHISE REVENUE OVER TIME
Cash 5,000
Unearned Franchise Revenue 5,000
18-157 LO 8
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18-158