Question

Case B

• On 1/2/20X1, Entity P, a manufacturer, sells equipment to a customer for consideration equal to 5% of the customer’s future net sales for the next year.
• The entity has determined that the transaction meets the criterion in Step 1 to be accounted for as a contract with a customer. Control of the equipment transfers to the customer on the date of sale (1/2/20X1).
• Based on the customer’s audited financial statements, the customer’s sales for the last ten years have fluctuated from $1.4 million to $2.2 million with the probability-weighted average amount being $2.0 million.
• Entity P is highly confident that the customer’s sales will not be less than $1.6 million in the next year.

How much revenue should the entity recognize upon transferring control of the equipment to the customer? Explain. Tip: See ASC 606-10-32-11. Also, prepare a journal entry for this transaction.

Answer 1