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Practice prompt · Q:revenue-from-contracts-with-customers/five-step-obligations-and-price-001

Carry an advance from signing through machine delivery

Separate two promises, allocate a fixed price, and reconcile the customer advance after the machine transfers.

Updated Sep 20, 2026 Review due Nov 18, 2026
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Northstar Systems signs a qualifying customer contract for a machine and one year of support. The fixed price is $90,000, due and paid in full at signing. The company sells the machine alone for $84,000 and support alone for $12,000. There are no opening contract balances, refunds, variable amounts, taxes, financing adjustments, or special discount-allocation conditions.

The machine works without the support, and the customer can obtain comparable support elsewhere. The seller does not integrate the two promises into a combined output. Neither promise changes the other, and the seller can fulfill each independently. These facts address both criteria for distinct promises in ASC 606-10-25-19 and the factors in 25-21.

The customer obtains control of the machine after signing. No support has been provided at that point. Assess the balances immediately after that delivery.

This contract reverses the balance direction in the Linden Peak example. Northstar receives the customer's money before it completes either promise, so start with the contract liability and reduce it only as Northstar performs.

Identify the obligations, allocate the transaction price, and select the correct result. Before revealing the answer, write the receipt and delivery entries. Reconcile the liability from signing through delivery and explain why collection does not itself establish revenue. Apply the presentation rule in ASC 606-10-45-2.

Your answer should leave $11,250 assigned to support and explain why that amount remains a contract liability after machine delivery.

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Answer: a

Choice a. Allocate $90,000 using the relative standalone prices: $90,000 times $84,000/$96,000 is $78,750 for the machine; $90,000 times $12,000/$96,000 is $11,250 for support. At signing, debit Cash and credit Contract Liability for $90,000. At machine delivery, debit Contract Liability and credit Revenue for $78,750. The remaining liability is $11,250. When all later support has been provided, the remaining $11,250 becomes revenue and this contract liability becomes zero. There is no receivable because the customer has paid in full. Separate selling prices support the ability to benefit from each promise; the supplied contract facts also establish that the promises are separately identifiable.