Question

Identifying the Validity of a Contract’s Features

Required

The following 6 items are from separate contractual agreements. Indicate which of the following requirements of a valid contract is primarily addressed in each of the items: (1) commercial substance, (2) approval, (3) identifiable rights and obligations, (4) identifiable payment terms, and (5) probable collection.

a. A contract for the sale of packaging to a manufacturer over a three-year period allows for the price of the packaging to increase with changes in the Consumer Price Index (to be determined at the end of each year).

b. The amount of a seller’s future cash inflows are expected to change by $100 as result of a contract.

c. A customer is negotiating a contract with its supplier for specialized equipment. The specifications of the equipment have been determined as well as the price. The date and means of delivery are still under negotiation.

d. A wholesaler sells electronics to a retailer in January. Due to the slow payment for a previous order, the wholesaler requested a 50% deposit upfront for the purchase. The wholesaler expects the remaining 50% payment to be collected.

e. A customer purchases dog food at a retailer for cash of $20 through a self-service, automated checkout register. The customer did not sign a written agreement to purchase the item or verbally agree to purchase the item.

f. A hospital treats an uninsured patient for emergency services. The amount billed to the patient for services was $1,500, but the average collection amount from an uninsured patient is approximately 10% of billed services.

Thanks.

Answer 1

Solution - ca) Commercial Substance In this case, Contract Price can be charged due to Price increase of the packaging (6) Commercial substance In this case it és clearly Inolicated that cash inflows. are expected to change by $100 as a result of Contract Vio C Approval Here negotiations done on formal basis and lack of approval exst to complete the transactions So approval must be done by both the parties. (d) Identifiable payment terms In this situation, it és Clearly mentioned about the Payment terms.

(e) Identifiable rights and obligations Here customer purchases dog food at a retaileen for cash of $20, so rights and obligations are automatically fixed for buyer and sellees. (A probable collection. It is mentioned that approximately 10% of billed Services can be generated from an uninsured patients So, it is a kind of Probable Collection where we can approximate the value of Collections