What is a performance obligation and how is it used to determine when revenue should be recognized?

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

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How should performance obligations determine revenue recognition?
What is a performance obligation?
What is a performance obligation and how is it related to revenue recognition quizlet?
When should revenue be recognized?

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	$ 18,200	$ 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	$1,852,000	$1,740,500

Liabilities and Stockholders’ Equity
Accounts payable	$ 79,000	$ 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, $10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	$1,852,000	$1,740,500

*Cash dividends were paid at the rate of $1 per share in the fiscal year 2017 and $2 per share in the fiscal year 2018.


BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
	2018	2017
Sales revenue	$3,000,000	$2,700,000
Cost of goods sold*	1,530,000	1,425,000
Gross margin	1,470,000	1,275,000
Operating expenses	860,000	780,000
Income before income taxes	610,000	495,000
Income taxes (40%)	244,000	198,000
Net income	$ 366,000	$ 297,000

Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.

Terms in this set (33)

In general, the "time value of money" refers to the fact that money to be received in the future is less valuable than the same amount of money received now. If you have the money now, you can invest it to earn a return so the money can grow to a larger amount in the future.
If payment occurs either before or after delivery, conceptually the arrangement includes a financing component. However, when delivery and payment occur relatively near each other, the financing component is not significant and can be ignored. As a practical matter, sellers can assume the financing component is not significant if the period between delivery and payment is less than a year. However, if the financing component is significant, sellers must take it into account, both when a prepayment occurs and when an account receivable occurs. We discuss accounting for the time value of money in Chapter 6, and apply it to many future chapters.

How should performance obligations determine revenue recognition?

Performance Obligations Satisfied at a Point in Time.

The seller has a present right to payment..

The customer has legal title to the asset..

The seller has transferred physical possession..

Significant risks and rewards of ownership have been transferred..

The customer has accepted the asset..

What is a performance obligation?

A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services as defined by the revenue standard.

Contracts between a seller and customer contain one or more Performance Obligations, which are promises by the seller to transfer goods or services to a customer. The seller recognizes revenue when it satisfies a performance obligation by transferring the promised good or service.

When should revenue be recognized?

According to the principle, revenues are recognized when they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.