ExpertHard1 markMultiple Choice
CPA · Question 40 · Area III: Select Transactions
Northstar Corp. enters into a 3-year service contract with a customer for $450,000, payable as follows:<br/>- Year 1: $200,000 (received)<br/>- Year 2: $150,000<br/>- Year 3: $100,000<br/><br/>The services are performed evenly over the 3-year period. Northstar's incremental borrowing rate is 8%. The present value factors are: Year 2 = 0.926, Year 3 = 0.794.<br/><br/>Under ASC 606, what is the transaction price for this contract?
Northstar Corp. enters into a 3-year service contract with a customer for $450,000, payable as follows:<br/>- Year 1: $200,000 (received)<br/>- Year 2: $150,000<br/>- Year 3: $100,000<br/><br/>The services are performed evenly over the 3-year period. Northstar's incremental borrowing rate is 8%. The present value factors are: Year 2 = 0.926, Year 3 = 0.794.<br/><br/>Under ASC 606, what is the transaction price for this contract?
Answer options:
A.
$450,000
B.
$433,100
C.
$418,300
D.
$400,000
How to approach this question
Under ASC 606, adjust the transaction price for significant financing components by calculating the present value of future payments using an appropriate discount rate.
Full Answer
C.$418,300✓ Correct
ASC 606-10-32-15 requires adjusting transaction price for significant financing components when payment timing differs significantly from performance timing. Present value = $200,000 (Year 1) + $138,900 (Year 2) + $79,400 (Year 3) = $418,300. The difference between nominal and present value indicates a significant financing component.
Common mistakes
Using nominal contract amount without considering financing component, applying wrong discount factors, or not recognizing when financing component adjustment is required
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