ExpertHard1 markMultiple Choice
Area III: Select Transactionsrevenue recognitionASC 606multiple performance obligationstransaction price allocation
CPA · Question 12 · Area III: Select Transactions
Metro Corp. enters into a contract to sell equipment to a customer for $500,000. The contract includes a 2-year service agreement valued at $80,000 if sold separately. Metro delivers the equipment on January 1, Year 1, and will provide services over the next 2 years.<br/><br/>Under ASC 606, how much revenue should Metro recognize on January 1, Year 1?
Metro Corp. enters into a contract to sell equipment to a customer for $500,000. The contract includes a 2-year service agreement valued at $80,000 if sold separately. Metro delivers the equipment on January 1, Year 1, and will provide services over the next 2 years.<br/><br/>Under ASC 606, how much revenue should Metro recognize on January 1, Year 1?
Answer options:
A.
$420,000
B.
$431,034
C.
$450,000
D.
$500,000
How to approach this question
Apply ASC 606 five-step model: identify performance obligations (equipment and service), determine standalone selling prices, allocate transaction price based on relative standalone selling prices, recognize revenue when performance obligations are satisfied.
Full Answer
B.$431,034✓ Correct
$431,034
Under ASC 606, when a contract contains multiple performance obligations, allocate the transaction price based on relative standalone selling prices. Equipment: $500,000 ÷ ($500,000 + $80,000) = 86.21% of $500,000 = $431,034. The equipment performance obligation is satisfied upon delivery.
Common mistakes
Recognizing full contract price for equipment, not identifying separate performance obligations, or using incorrect allocation methods
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