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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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Consider each of the following scenarios:

  1. a. A seller orally agrees with one of its best customers to deliver goods in exchange for $10,000. While the seller’s practice is to obtain a written sales agreement, the seller delivered these goods to the customer without a written agreement due to the customer’s urgent need.
  2. b. A seller agrees to provide accounting services to a customer for the next year in exchange for $40,000. While the two parties are negotiating the terms of the agreement and the specific services to be performed, the seller begins to perform some services as a gesture of good faith.
  3. c. A seller has a written agreement to deliver goods to a customer for $50 per unit. The price will drop to $45 per unit if the customer purchases more than 2,000 units per month.
  4. d. A seller had a written agreement and provided custodial services to a customer for $2,000 per month in a previous year. The contract expired on December 31, 2019. During negotiations for a new contract in January 2020, custodial services were provided at the previous monthly rate and paid for by the buyer. The seller and the customer agree to a new contract on February 1, 2020. The seller is concerned whether a contract existed in January 2020 and whether revenue can be recognized.

Required:

  1. 1. Determine if a contract exists for each of the scenarios.
  2. 2. If it is determined that a contract exists but the seller believes it is probable that it will not collect the expected consideration, how does this affect the seller’s ability to recognize revenue?

1.

To determine

Ascertain whether a contract exists for each of the scenarios.

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.

a. Yes, a contract exists. An oral contract signify an “enforceable contract” as long as the contract is accepted by both parties, right of each party can be recognized, terms of payment can be recognized, the contract has commercial substance, and it’s possible that the company will bring together the consideration to which it is entitled. All of these conditions seem to be met in this scenario.

b. No, a contract does not exist. A company should be capable of identifying each party’s rights with respect to the goods or services to be transferred...

2.

To determine

State the manner in which the seller’s ability to recognize revenue is affected if it is ascertained that a contract exists but the seller believes it is possible that it will not collect the expected consideration.

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