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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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CustomTee Inc. contracts with various customers to sell T-shirts. In the case of sales, CustomTee’s normal accounting policy requires a written and signed sales agreement. On July 1, in response to a special last-minute phone call from a regular customer, CustomTee delivered 500 T-shirts for $5,000. Does CustomTee have an enforceable contract?

To determine

Ascertain whether the Incorporation T has enforceable contract.

Explanation

Contract:

Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.

Criteria that company must apply to revenue recognition standards to contracts are as follows:

  • Parties to the agreement must accept the contract either in written form, orally, or by implication.
  • The company must be able to recognize the rights of each party with respect to goods and services transferred.
  • The company must be able to recognize terms of payment with respect to goods and services transferred. This does not imply that the transaction price must be fixed or explicitly stated. In fact, the price of transaction can differ due to discount or rebates.
  • The contract must have commercial substance which means that the contract should change the amount, timing or possibility of the company’s future cash flows.
  • It is possible for the company to collect the consideration to which it is entitled in “exchange for the goods or services” that will transferred to the customer...

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