Allocate Transaction Price To Performance Obligations
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CPA Financial Accounting and Reporting (FAR) › Allocate Transaction Price To Performance Obligations
A private, for-profit marketing agency enters into a contract to provide (1) a brand strategy deliverable and (2) a six-month digital campaign management service. The customer pays a fixed $80,000 plus a $20,000 success fee if specified lead-generation targets are met; the agency estimates the expected value of the success fee to be $12,000 and concludes it is not constrained, so it includes $12,000 in the transaction price. The observable standalone selling prices are $50,000 for brand strategy and $50,000 for campaign management. How should the entity allocate the transaction price?
Allocate the $12,000 variable consideration entirely to campaign management and allocate the $80,000 fixed fee based on relative standalone selling prices.
Allocate the $92,000 transaction price based on relative standalone selling prices to both performance obligations.
Allocate only the fixed $80,000 based on relative standalone selling prices, and recognize the success fee when earned.
Allocate the $92,000 transaction price entirely to brand strategy because it is delivered first.
Explanation
ASC 606 requires entities to include variable consideration in the transaction price when not constrained and allocate the total transaction price based on relative standalone selling prices unless specific criteria for allocating variable consideration are met. The key facts are: fixed fee of $80,000, expected value of success fee is $12,000 (not constrained), total transaction price of $92,000, and equal standalone selling prices of $50,000 each. The correct allocation applies relative standalone selling prices: each performance obligation receives $46,000 ($92,000 × $50,000/$100,000). Option A incorrectly excludes variable consideration that is not constrained. Option C incorrectly allocates variable consideration to a specific obligation without meeting the criteria in ASC 606-10-32-40. Option D incorrectly allocates based on delivery timing rather than standalone selling prices. The framework is: (1) estimate variable consideration, (2) apply the constraint, (3) include in transaction price if not constrained, and (4) allocate total transaction price proportionately unless variable consideration allocation criteria are met.
A private, for-profit biotech company enters into a contract to provide (1) a research report and (2) a license to use certain data for two years. The customer agrees to pay $60,000 in cash and transfer publicly traded shares with a fair value at contract inception of $40,000; the observable standalone selling prices are $70,000 for the research report and $50,000 for the data license, and the entity measures non-cash consideration at fair value under ASC 606. How should non-cash consideration be valued for allocation and how should the entity allocate the transaction price?
Measure the shares at the customer’s historical cost and allocate total consideration based on relative standalone selling prices.
Measure the shares at fair value at contract inception and allocate the $100,000 transaction price based on relative standalone selling prices.
Measure the shares at fair value when the shares are received and allocate only the $60,000 cash to performance obligations.
Measure the shares at par value and allocate the discount entirely to the research report.
Explanation
ASC 606-10-32-21 requires non-cash consideration to be measured at fair value at contract inception, and the total transaction price (including non-cash consideration) should be allocated based on relative standalone selling prices. The key facts are: $60,000 cash, shares with $40,000 fair value at contract inception (total transaction price $100,000), and standalone selling prices of $70,000 (research report) and $50,000 (data license) totaling $120,000. The correct allocation uses relative standalone selling prices: Research report receives $58,333 ($100,000 × $70,000/$120,000) and data license receives $41,667 ($100,000 × $50,000/$120,000). Option A incorrectly uses historical cost rather than fair value. Option C incorrectly measures shares at a later date and excludes non-cash consideration from allocation. Option D incorrectly uses par value and misallocates the discount. The framework is: (1) measure non-cash consideration at fair value at contract inception, (2) include in total transaction price, (3) allocate total consideration based on relative standalone selling prices, and (4) recognize any variability in fair value after contract inception separately from revenue.
A private, for-profit software company enters into a contract to deliver (1) a perpetual software license at contract inception and (2) one year of post-contract customer support (PCS). The stated transaction price is $100,000, which includes a bundled discount; the entity’s observable standalone selling prices are $90,000 for the license and $30,000 for PCS, and the entity’s policy under ASC 606 is to allocate discounts proportionately to all performance obligations unless the criteria to allocate the discount to a specific obligation are met (not met here). How should the entity allocate the transaction price to the performance obligations?
Allocate $90,000 to the license and $10,000 to PCS based on stated contract amounts.
Allocate $75,000 to the license and $25,000 to PCS based on relative standalone selling prices.
Allocate $70,000 to the license and $30,000 to PCS because the discount should be allocated to the license only.
Allocate $100,000 entirely to the license because it is delivered at contract inception.
Explanation
ASC 606 requires entities to allocate the transaction price to performance obligations based on relative standalone selling prices when bundled discounts are not specifically attributable to one or more obligations. The key facts are: transaction price of $100,000, standalone selling prices of $90,000 (license) and $30,000 (PCS) totaling $120,000, and a policy to allocate discounts proportionately. The correct allocation follows the relative standalone selling price method: License receives $75,000 ($100,000 × $90,000/$120,000) and PCS receives $25,000 ($100,000 × $30,000/$120,000). Option B incorrectly uses stated contract amounts rather than standalone selling prices. Option C incorrectly allocates everything to one obligation based on timing. Option D incorrectly allocates the discount to only one performance obligation. The framework for allocation is: (1) identify all performance obligations, (2) determine standalone selling prices, (3) calculate the total discount, and (4) allocate the transaction price proportionately unless specific criteria for targeted discount allocation are met.
A for-profit, private electronics supplier enters into a contract to deliver (1) specialized equipment and (2) installation services. At contract inception, the transaction price is $120,000 and the observable standalone selling prices are $110,000 for the equipment and $20,000 for installation; after signing, the customer modifies the contract to add extended installation training for an additional $9,000, which is priced at its standalone selling price, and the training is distinct. Under ASC 606, what impact does the contract modification have on the allocation?
Allocate the $9,000 modification consideration proportionately to the original equipment and installation obligations because it is added after contract inception.
Allocate the original $120,000 entirely to equipment because it is the primary performance obligation, and allocate $9,000 to training.
Reallocate the combined consideration of $129,000 across all three performance obligations based on updated relative standalone selling prices.
Treat the modification as a separate contract and allocate the original $120,000 based on original relative standalone selling prices; allocate $9,000 entirely to training.
Explanation
ASC 606-10-25-12 states that a contract modification for additional distinct goods or services priced at their standalone selling prices should be treated as a separate contract. The key facts are: original contract for equipment and installation at $120,000, modification adds distinct training at its standalone selling price of $9,000. Since the training is distinct and priced at standalone, the modification creates a separate contract. The original $120,000 is allocated based on original relative standalone selling prices: Equipment receives $101,538 ($120,000 × $110,000/$130,000) and installation receives $18,462 ($120,000 × $20,000/$130,000), while the $9,000 is allocated entirely to training. Option B incorrectly combines and reallocates all consideration. Option C incorrectly allocates modification consideration to original obligations. Option D incorrectly allocates based on primary obligation rather than relative standalone selling prices. The framework for modifications is: (1) determine if additional goods/services are distinct, (2) assess if priced at standalone, (3) treat as separate contract if both criteria are met, and (4) maintain original allocation for unmodified obligations.
A public, for-profit telecommunications entity sells (1) a handset and (2) a 24-month service plan for a stated contract price of $1,200, payable monthly, with no contract modification. The observable standalone selling prices are $600 for the handset and $1,800 for the service plan, and the entity applies ASC 606 by allocating the transaction price to performance obligations based on relative standalone selling prices. How should the entity allocate the transaction price?
Allocate $300 to the handset and $900 to the service plan based on relative standalone selling prices.
Allocate $600 to the handset and $600 to the service plan based on the stated contract price split between goods and services.
Allocate $1,200 entirely to the service plan because consideration is billed monthly.
Allocate $400 to the handset and $800 to the service plan based on relative standalone selling prices.
Explanation
ASC 606 requires allocation of the transaction price to performance obligations based on relative standalone selling prices, regardless of payment timing or stated contract splits. The key facts are: transaction price of $1,200, standalone selling prices of $600 (handset) and $1,800 (service plan) totaling $2,400, creating a 50% bundled discount. The correct allocation uses relative standalone selling prices: Handset receives $300 ($1,200 × $600/$2,400) and service plan receives $900 ($1,200 × $1,800/$2,400). Option A incorrectly uses stated contract splits rather than standalone selling prices. Option C incorrectly allocates everything to one obligation based on billing method. Option D incorrectly calculates the allocation percentages. The allocation framework requires: (1) identify total transaction price regardless of payment timing, (2) determine standalone selling prices, (3) calculate relative percentages, and (4) allocate based on these percentages rather than contract-stated amounts or billing patterns.
A private, for-profit engineering firm signs a contract to (1) provide a feasibility study and (2) perform detailed design services. The fixed transaction price is $200,000, and the firm’s observable standalone selling prices are $60,000 for the feasibility study and $190,000 for the design services; the contract includes a bundled discount and the firm’s ASC 606 policy is to allocate discounts proportionately across all performance obligations when the discount is not specifically attributable. How should the entity allocate the transaction price?
Allocate $48,000 to the feasibility study and $152,000 to the design services based on relative standalone selling prices.
Allocate $60,000 to the feasibility study and $140,000 to the design services based on stated deliverables.
Allocate $200,000 entirely to design services because it is the larger component of the contract.
Allocate $10,000 of the discount entirely to the feasibility study and allocate the remainder based on standalone selling prices.
Explanation
ASC 606 requires allocation of bundled discounts proportionately across all performance obligations based on relative standalone selling prices when the discount is not specifically attributable. The key facts are: transaction price of $200,000, standalone selling prices of $60,000 (feasibility study) and $190,000 (design services) totaling $250,000, creating a $50,000 bundled discount. The correct allocation uses relative standalone selling prices: Feasibility study receives $48,000 ($200,000 × $60,000/$250,000) and design services receive $152,000 ($200,000 × $190,000/$250,000). Option A incorrectly uses stated deliverable amounts rather than the allocation method. Option B incorrectly allocates everything to one obligation. Option D incorrectly allocates the entire discount to one performance obligation without meeting the specific criteria. The allocation framework is: (1) sum all standalone selling prices, (2) calculate the bundled discount, (3) determine if discount allocation criteria are met, and (4) allocate proportionately based on relative standalone selling prices if criteria are not met.
A for-profit, public manufacturer sells (1) a machine and (2) a one-year maintenance plan for a total contract price of $95,000. The observable standalone selling prices are $100,000 for the machine and $20,000 for the maintenance plan, and the entity’s ASC 606 policy is to allocate any discount proportionately unless the discount is specifically attributable to one or more performance obligations (not the case here). How should the entity allocate the transaction price?
Allocate $95,000 equally between the machine and maintenance because both are distinct.
Allocate $95,000 entirely to the machine because it is the primary deliverable.
Allocate $79,167 to the machine and $15,833 to maintenance based on relative standalone selling prices.
Allocate $75,000 to the machine and $20,000 to maintenance because maintenance is priced at its standalone selling price.
Explanation
ASC 606 requires entities to allocate bundled discounts proportionately across all performance obligations based on relative standalone selling prices when the discount is not specifically attributable. The key facts are: transaction price of $95,000, standalone selling prices of $100,000 (machine) and $20,000 (maintenance) totaling $120,000, creating a $25,000 bundled discount. The correct allocation uses relative standalone selling prices: Machine receives $79,167 ($95,000 × $100,000/$120,000) and maintenance receives $15,833 ($95,000 × $20,000/$120,000). Option B incorrectly assumes maintenance is sold at standalone price when the contract contains a bundled discount. Option C incorrectly allocates everything to the primary deliverable. Option D incorrectly uses equal allocation rather than relative standalone selling prices. The allocation framework requires: (1) determine standalone selling prices, (2) calculate total bundled discount, (3) verify discount allocation criteria are not met, and (4) allocate transaction price proportionately based on relative standalone selling prices.