Problem
Judgement Case 1: Judgement in Revenue Recognition
Albasco, Inc is a calendar year-end clothing manufacturer that sells exclusively to retailers. It engages in a large number of contracts with its customers. Below are some specific contract issues that have arisen this year.
1.) Albasco signed a contract with Socs are Us to ship 100,000 pairs of socks on December 27. The contact price is $5 per pair, with nonrefundable payment due upon receipt of the socks. Albasco immediately delivers the socks to Socks Are Us once the contract is signed by both parties, with the socks arriving on December 28. However, Socks Are Us has not remit use they are news, ed payment as of December31. It is clear to Absco that it will have to offer the customer a price concession in order to receive any payment at all. Absco has not had extensive dealings with Socks Are US, but estimates it will need to offer a 25% discount. Should Absco recognize any revenue related to this arrangement in the current year? If so how much?
Yes, because delivery has occurred and the customer has received them. Socks are estimated to be discounted to $3.75 to ensure collection. Absco should recognize $375,000 revenue in the current year.
2.) Absco signed a contract with Jeans Are Us to ship 300,000 pairs of jeans. The contract price is $20 per pair. These jeans are very fashionable at the current time, but are not expected to stay in style for a long period of time. Because they are new, Absco has only manufactured 10,000 pairs. The contract specifies that Absco will immediately ship the 10,000 oars ad will then ship the remaining portions of the 290,000 pairs as soon as possible after a specific number of pairs are requestedby Jeans are Us. If Absco has shipped less than 300,000 pairs of jeans by the end of the year, it will ship the remaining jeans to fulfill the contact at the end of one year. Because Jeans Are Us is concerned that the demand for these jeans will be heavy, it has provided incentive in the contract for Avsco to expedited production of the jeans. Jeans are us will provide a bonus to Absco if it delivers the jeans within a certain period of time of the request. The percentage bonus is as follows:
Delivered within: Percentage bonus
1 day of request 5%
3 days of request 4%
5 days of request 3%
10 days of request 2%
Absco has never been involved in a transaction that involves bonuses for deliver expediency. In addition, because of the newness of this particular style of jeans on the market, Jeans Are Us is not able to give Absco any idea of when it will request the jeans and how many it will request each time.
Absco uses the expected value method of measuring variable consideration Accordingly, it has determined that the expected value of the bonus consideration is considered $180,000. However, Absco is quite uncertain how quickly it can manufacture these jeans. What is the total transaction price for this contract?