To: this agreement, the Seller cannot sell

To: The Audit Public Group Inc.
From: Xuyen Ngo
Date: October 20,2018
Subject: Accounting for revenue recognition of Public Group.
On November 30, 2018, Watson (or “the Buyer”) has the verbal agreement with Public Group INC. (or PG or “the Company” or “the Seller”) which create enforceable right and obligation. The Seller agrees to provide: one TV commercial, one app, and a Facebook page. The total amount of the agreement is $1,500,000 and Watson already makes the payment of $750,000 on the same day. The remaining of 50 percent will be paid over the rest of the development period. In this agreement, the Seller cannot sell the items to another customer. The Buyer can’t break the contract with PG unless PG’s failure to deliver the items as promised.
ASC 606, Revenue from the contract with the customer, indicates that “the companies recognize revenue when goods and services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services.” Therefore, PG shall account for a contract with Watson because the agreement satisfies five criteria in paragraph 606-25-10-1 of revenue recognition. On the other hand, the paragraph 606-10-25-27 through the 25-29 address that “For each performance obligation satisfies over time, an entity shall recognize revenue over time by measuring the process toward complete satisfaction of that performance obligation.” For each time of the development period, PG should account the revenue base on the amount the Company receives from the Buyer during the development period.
According to ASC 606-10-05-4, the Company should “recognize the revenue in accordance with the core principle by applying the following steps.” In the first step, the Company should “identify the contract with the customer- A contract is an agreement between two or more parties that create enforcement rights and obligations.” In this case, the Seller and Buyer have the verbal agreement and all the criteria of the contract are compliance with the case. Therefore, it clearly to understand that the contract exists. Following to the step two “identify the Performance Obligations in the contract- A contract includes promises to transfer goods or services to a customer” (ASC 606-10-05-4). The Company created a TV commercial, build a Facebook page, and an app which is identified separately. They all have different prices and can be sold together or separately as well. In this case, the goods are not inter-related “If those goods or services are distinct, the promises are performance obligations and are accounted for separately.” Step three is “determine transaction price-The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer” (ASC 606-10-05-4). The Seller can consider this transaction as “Transaction price”: the amount of $1.5 M for the marketing services as per agreement and if the app is downloaded 500K times in the first month, $250K would be payable to PG as a one-time bonus. The paragraph ASC 606-10-32-8 defines that the Seller should “use any method which expects predict the amount of consideration.” The Company predicted as per the customer base of Watson that the additional one-time bonus will not be received, it can use the most likely amount “an appropriate estimate of the amount of variable consideration if the contract has only two positive outcomes.” The Company can define the amount of payment by “Allocate the transaction price to the performance obligations in the contract- An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling price of each distinct goods or services promised in the contract” (ASC 606-10-32-40). The Company doesn’t have the standalone selling price when signing the agreement with Watson. In addition, the Buyer receives the discount amount of $250,000 when purchasing the items together “The requirements specify when an entity allocated the discount or variable consideration to one or more, but not all, performance obligation in the contract” (606-10-32-29). The Company can “recognize the revenue when the entity satisfies the performance obligation or transfer the distinct good or service specify the outcome from satisfying the performance obligation” (ASC 606-10-32-40). Each of the services has a different period of time to develop and complete; therefore, the Company will recognize the revenue when “the amount allocated to the satisfied performance obligation.”
If the app sold to Watson is actually downloaded more than 500,000 times in the first month, the company will allocate the transaction price “in an amount that depicts the amount of consideration to which the entity expects to be titled in exchange for transferring the promise goods or service to the customer” (ASC 606-10-32-28). Overall, the Seller can recognize revenue overtime.
On November 30, 2018, PG should recognize the revenue base on the contract agreement with Watson. The agreement creates enforceable rights and obligations pursuant. Moreover, the contract is satisfied all “the five steps to revenue recognition” under the new GAAP revenue recognition standard (ASC 606).


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