Revenue Recognition Alternatives Each of the following independent situations re

Question

Revenue Recognition Alternatives Each of the following independent situations relates to the recognition of revenue: On June 2, 2017, a customer books travel on an airline, paying $500 for a round-trip ticket that departs July 15 2017, and returns July 20, 2017. In addition, once the round-trip ticket is used, the airline credits the passen- ger's frequent-flier account for 500 miles. The airline determines that cach frequent-flier point has a value of S0.01 On May 1, 2017, a retailer enters into a contract with a construction company. The construction company will build a new warchouse for the retailer at a price of $2 million. The retailer will make four equal payments to the construction company over the 1-year construction period, starting on May 1, 2017, and then every 4 months. The retailer can cancel construction at any time and will own any construction to date; however, it must pay the construction company for work done up to the cancellation date. The building is completed on April 30, 2017. Morning Donut agrees to supply donuts and coffee on a daily basis to a local business. The contract starts on January 1, 2017, and runs for 1 year. Morning Donut charges $400 per week for the donuts and coffee. The Raleigh Knights sell four season tickets to a customer. The Knights play 10 regular season games, and the cost of one season ticket is $250. b. c. d. Required: For each situation, use the 5-step process to determine when revenue can be recognized. Determine (1) if a con- tract exists, (2) the performance obligations in the contract, (3) the transaction price in the contract, (4) how the transaction price is allocated to the performance obligations, and (5) when revenue is recognized.

Explanation / Answer

(a) (1) Yes, Contract Does Exists between the two parties for a consideration. Since Flight tickets and the travel points are provided for a consideration to airlines.

(2) The airline is now having an obligation i.e. It is legally bound to give flight service to the customer on 15th July 2017 and 20th July 2017. But the obligation to credit flight flier point arises only when the flight ticket used.

So here it is assumed that flight tickets will be used by the customer and then the airline company will be obligated to credit $5 to frequent flier account.

(3) The transaction price will be $495 since $5 credits will be given in flier's account after the trip

(4)Here there are two obligations where the amount will be allocated (a) $ 250 each side will be allocated to the trip

(b) 5$ for the credit in frequent flier account

(5) Revenue will be recognized after the flight i.e after 20th July 2017

(b) This question is not logically correct here it is written that contract was entered on 1 may 2017 and building was built on 30 April 2017

This is practically impossible.

(C) (1) It is clearly stated that the contract exists between Morning Doughnut and the local business

(2) Performace obligation to supply donuts and coffee to the business for one year starting from 1 January 2017

(3) Transaction price of the contract is 52*$400=$20800 (assuming 52 Weeks in a year)

(4) transaction price of $ 20800 is allocated $400 each week after the sucessful supply of coffee and doughnuts each week.

(5) Revenue is recognized on a weekly basis by Morning Doughnuts.

(D) (1)Since knights have sold only 4 tickets so the contract does exist between the Knight and the customer for 4 games only.

(2) There is no separate performance obligation other than letting customer play games

(3) Transaction price is $1000 ($250*4)

(4) Transaction Price of $250 is allocated to each ticket sold.

(5) Revenue is recognized right after tickets being sold assuming to be no refund policy.

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