Question

Existence of a contract (LO 3-2)

Lemon Corporation and Morley, Inc., have entered into an arrangement whereby Lemon will supply materials and 1,000 hours of its scientists’ time for a project to be undertaken at Morley’s research facility in Austin, TX. Morley will also contribute its scientists’ time to the project.

Required:

For each of the following independent scenarios, does Lemon have a contract with a customer subject to ASC Topic 606?

1. Lemon has agreed to provide materials and scientists’ time in exchange for a payment from Morley based on the quantities of each resource contributed.
2. Lemon has agreed to provide materials and scientists’ time in exchange for a percentage of the profits from the sale of the product developed jointly by Lemon and Morley.

Answer 1

In both cases Lemon has a contract with Morley. It is immaterial whether the consideration for the materials and scientists' time of Lemon is given by way of cash consideration or a share in future profits on sale of the product. Both the contracts are enforceable in court of law.