Which of the following describes the 'Residual Approach' for allocating transaction price under ASC 606?

Answer options:

Subtracting the sum of observable standalone selling prices of other goods from the total transaction price to estimate the price of a good with a highly variable or uncertain price.

Allocating price based on the weighted average of competitor prices.

Estimating the cost to satisfy the performance obligation and adding a reasonable margin.

Allocating price based on the relative list prices of all items.

How to approach this question

Residual = Total - Knowns. Only allowed if SSP is highly variable or uncertain.

Full Answer

A.Subtracting the sum of observable standalone selling prices of other goods from the total transaction price to estimate the price of a good with a highly variable or uncertain price.✓ Correct

ASC 606-10-32-34 allows the residual approach only if the standalone selling price is highly variable or uncertain. It involves taking the total transaction price and subtracting the observable SSPs of other performance obligations.

Common mistakes

Using residual approach when SSP is observable.

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