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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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On November 1, 2019, Olivia’s Art Shoppe agreed to a contract with Tobacco Road Company to create 10 murals for the company’s corporate headquarters. The contract has a transaction price of $800,000. The contract has the following features:

  • All of the murals will be delivered and installed on February 1, 2020.
  • Tobacco Road can cancel the contract at any point in time. Any murals created before cancellation will remain the property of Olivia’s Art Shoppe.
  • Tobacco Road paid $50,000 on November 1, 2019, and will pay the balance on February 1, 2020.

Olivia’s Art Shoppe is nationally known and demand for its large murals is very high. On December 31, 2019, the CFO of Olivia’s Art Shoppe determines that 7 of the 10 murals have been completed and recognizes $560,000 (7/10 × $800,000) of revenue.

Required:

Is the accounting for the murals by Olivia’s CFO consistent with GAAP? Support your opinion by discussing the application to this case of the factors that need to be considered for revenue recognition.

To determine

Discuss the application regarding the factors that need to be considered for revenue recognition.

Explanation

Any of the following three conditions must be met, for a “performance obligation” to be fulfilled over time versus a point in time:

  • The performance of the seller builds or improves as asset (for instance, work in progress) that the customer controls the asset as it is built or improved.
  • Simultaneously the customer receives and consumes the advantage of the performance of the seller as the seller performs.
  • The performance of the seller does not build an asset with a substitute use to the seller...

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