Which of the following is an indicator that an entity is an agent rather than a principal in a revenue contract under ASC 606?

Answer options:

The entity does not have inventory risk before or after the goods have been ordered by the customer.

The entity has discretion in establishing the price for the specified good or service.

The entity is primarily responsible for fulfilling the promise to provide the specified good or service.

The entity controls the good or service before it is transferred to the customer.

How to approach this question

Principal = Controls good/service before transfer (Gross Revenue). Agent = Arranges for another party to provide (Net Revenue). Indicators of Agent: No inventory risk, no pricing discretion, another party is primarily responsible.

Full Answer

A.The entity does not have inventory risk before or after the goods have been ordered by the customer.✓ Correct

ASC 606-10-55-39 lists indicators that an entity is an agent: another party is primarily responsible for fulfillment; the entity does not have inventory risk; the entity does not have discretion in establishing the price.

Common mistakes

Confusing Principal and Agent indicators.

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