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On the first day of the semester, a student walks into the University’s Coffee House and orders a large coffee in a campus-branded, thermal coffee mug as part of a "welcome back to school" special. As the student is focused on sustainability, the student plans to use this mug daily for refills rather than using paper cups. The barista pours the coffee into the mug and delivers it to the student. The cashier then collects $7 from the student. Standalone selling prices are $5 for the coffee and $3 for the mug, so the student got a bargain on the combined purchase. The student takes the coffee in the new mug and enjoys it while reading The Wall Street Journal.

Requirements:

Prepare a proper form with reference to the proper sections of the FASB codification

-Review ASC 606 for the five steps in the revenue recognition model paying special attention to ASC 606-10-25-19 through 22 and ASC 606-10-32-31 through 32.

-For each of the five steps:

-Analyze how each revenue model step applies to this transaction. Refer to the proper ASC section in your memo. For any step that is not applicable, simply indicate it is not applicable.

- Draw a conclusion as to whether the requirements for that step were complied with.

- As a final conclusion, determine the amount of revenue that should be recognized with detailed calculations and provide the journal entry to record the transaction.

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Answer:

Explanation:

Step 1: Identify the contract with the customer

-Approval and commitment

- Identification of the rights of the parties – The student has a right to the coffee and mug and the Coffeehouse has a right to payment.

-Identification of payment terms – A $7 payment will be required before delivery of the coffee and mug.

-The contract has commercial substance – The student is exchanging cash for coffee and a mug.

-It is probable that the consideration will be collected – The consideration of $7 cash is paid before delivery.

Conclusion: It appears there is a valid, implied contract with a customer.

Step 2: Identify the performance obligation. The performance obligations are the Coffee House’s obligation to transfer a cup of coffee and to transfer a mug to the student. The cup of coffee and mug would each be considered distinct goods or services if both of the following criteria are met per ASC 660-10-25-19

:►Capable of being distinct – The student can benefit from the coffee or mug either on their own or together with other resources that are readily available to the student .Per ASC 660-10-25-20, the fact that the Coffee House sells the coffee and mug separately indicates that the student can benefit from the coffee and mug on their own.

►Distinct within the context of the contract – The Coffee House’s promise to transfer the coffee is separately identifiable from the promise to transfer the mug.ASC 606-10-25-21 identifies three factors that should be considered to evaluate this criteria. The Coffee House does not provide a significant service of integrating the coffee with the mug as a bundle. The student could drink their cup of coffee in a paper cup instead, and the Coffee House would provide a similar service by pouring the coffee. The additional service of providing a paper cup would not be considered significant.–The cup of coffee does not modify or customize the coffee mug or vice versa.–The cup of coffee is not highly dependent on or highly interrelated with the coffee mug. The student can receive the coffee in a paper cup.

Conclusion: There are two performance obligations — one for the coffee and one for the mug. Both the coffee and the mug can be enjoyed by themselves and the transfer of the coffee is separate from the transfer of the mug.

Step3: Determine the transaction price

The transaction price in this case is $7

Conclusion: The transaction price is $7

Step4: Allocate the transaction price to the performance obligations

The Coffee House should allocate the $7 transaction price based on the product’s relative standalone selling price as follows

Obligation

Standalone selling price

Percentage

Allocated transaction price

Coffee

$5.00

62.50%

$4.38

Coffee mug

3

37.5

2.62

Total

$8.00

100%

$7.00

Step 5: recognize revenue as performance obligation is satisfied Coffee, recognized at a point in time Coffee House has right to payment Student has right to coffee. Coffee House has transferred coffee to student. Student has risks and rewards recognized at a point in time Coffee House has received payment Student has right to mug Coffee House has not transferred mug to Conclusion Recognize revenue as each performance obligation is satisfied

Conclusion: Recognize revenue as each performance obligation is satisfied.

Delivery of Coffee

Cash $4.38

Sales Revenue $4.38

Delivery of Coffee mug

Cash $2.62

Unearned revenue $2.62

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