Revenue From Contracts With Customers Examples
Part I: For each of the scenarios determine if a contract exists by applying the 5 requirements for a contract to exist under ASC 606.
1. For each of the following independent situations determine if a contract exists as of January 31st, 2018 by Anderson Corporation. Assume Anderson is a publicly traded company with a calendar fiscal year.
a. A regular customer of Anderson’s always places an order on the last day of the month, but did not do so in January. Anderson is certain it will because the customer’s purchasing agent was ill and that the order will be received when she returns. In fact, the order is received by fax in early February, with an apology from the customer’s purchasing manager and a note requesting that Anderson “expedite shipment of the January order.”
b. One of Anderson’s customers calls on January 29th and gives Anderson a list of goods it intends to buy, but with the caveat that the order is subject to approval of the purchasing manager, who will not be in for several days. The order is received by fax on February 4th when the purchasing manager returns.
c. One of Anderson’s customers calls and gives Anderson an order. Anderson typically receives orders by fax and asks the customer to confirm the order by fax, which it does on Feb.2nd
d. Anderson and one of its customers agree that Anderson will sell it certain goods, but that the price will depend on the price of oil two weeks later. Anderson and the customer have agreed on the formula that will determine the price of goods based on the price of oil. Anderson makes this arrangement because oil is a key component of the goods that Anderson sells.
2. Latter Corporation received an order from Murray, Inc. for electronic components on Feb. 27th. Because Murray is struggling financially, Latter called the company and said it will get ready to fulfill the order, but it will not ship the order until payment is received by cashier’s check. Does Latter have a contract as of February 28th?
Part II. Determine the number of performance obligations that exist in the following scenarios.
1. Tablet Tailors sells tablet PCs combined with Internet service which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hotspot. It offers two bundles with the following terms:
a. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the table and a 3 year Internet connection service contract is $500. The standalone selling price of the table is $250. Tablet Tailors sells the Internet access service independently for an upfront payment of $300.
b. Tablet Bundle B includes the tablet and Internet plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3 year period. The product bundle sells for $600. Tablet Tailors provides the 3-year service plan as a separate product with a standalone price of $150.
2. Garths Windows manufactures and sells custom storm windows for three season porches. Garths also provides installation service for the windows. The installation process does not involve changes in the windows so this service can be performed by other vendors. Garths enters into the following contract on July 1, 2018: The customer purchases windows for a price of $2,400 and chooses Garths to do the installation.