ExpertMedium1 markMultiple Choice
CPA · Question 23 · Area II: Technical Accounting
Construct Corp. enters into a contract to build a specialized satellite for a government customer. The contract price is $10 million. The satellite has no alternative use to Construct Corp., and the contract provides an enforceable right to payment for performance completed to date. How should revenue be recognized under ASC 606?
Construct Corp. enters into a contract to build a specialized satellite for a government customer. The contract price is $10 million. The satellite has no alternative use to Construct Corp., and the contract provides an enforceable right to payment for performance completed to date. How should revenue be recognized under ASC 606?
Answer options:
A.
Over time, because the asset has no alternative use and the entity has a right to payment.
B.
Point in time, when the satellite is delivered and accepted.
C.
Point in time, when the contract is signed.
D.
Over time, only if the customer controls the asset as it is created.
How to approach this question
Check the 3 criteria for Over Time recognition: 1. Customer receives benefits as performed (cleaning service). 2. Customer controls asset as created (building on customer land). 3. No alternative use + Right to payment (specialized manufacturing).
Full Answer
A.Over time, because the asset has no alternative use and the entity has a right to payment.✓ Correct
ASC 606-10-25-27 states that revenue is recognized over time if the entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date.
Common mistakes
Thinking over-time only applies to construction on customer land; ignoring the 'right to payment' clause.
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