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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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The first step in the revenue recognition process is determining if a contract is in place between the seller and the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. The standard states that a contract may be written, oral, or implied by customary business practices. To be a contract, the accounting standard states that it must meet five criteria.

Required:

Discuss the criteria necessary for a contract to be considered under the revenue recognition process. How would a company account for a contract that does not meet the criteria?

To determine

Discuss the criteria required for a contract to be considered under the revenue recognition process and explain the manner in which the company will account for a contract that does not meet the criteria.

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...

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