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Worked-example setupScope and assumptions
- Cedar Service is fictional. The schedule isolates one qualifying Topic 606 customer contract during September; all shown accounts open at zero.
- An enforceable, unconditional $9,000 payment becomes due before any service transfers. The customer later pays $6,000 against that receivable.
- Subsequent completed service qualifies for $3,000 of revenue. The recognition and allocation conclusions are stipulated.
- Cedar then pays a $1,000 refund for a cancelled, wholly unperformed portion. The cancellation reduces the remaining service obligation by $1,000 and does not change the unpaid receivable or recognized revenue.
- No other transactions, taxes, financing effects, credit losses, or contract changes apply.
- Period
- September, before closing the revenue account
- Units
- US dollars
- Rounding
- Whole dollars; no rounding required
Facts and task
Cedar Service has no opening balances for this contract. An unconditional $9,000 payment becomes due before Cedar provides any service. The customer later pays $6,000. Cedar then completes service that qualifies for $3,000 of revenue under the supplied contract analysis.
Finally, Cedar refunds $1,000 for a cancelled, wholly unperformed portion. The cancellation reduces the remaining service obligation by that amount. It does not change the unpaid receivable or revenue already earned. These are stipulated consequences of the cancellation, not a general refund rule.
Record the four events and reconcile the ending balances. Amounts are US dollars for September. There are no other transactions, taxes, financing effects, credit losses, or contract changes.
Record the right and the obligation
ASC 606-10-45-2 on FASB addresses consideration received or due before transfer. Cedar's payment is unconditional and due. The customer owes Cedar money, while Cedar still owes the service. Those are separate balances.
| Event | Debit | Credit |
|---|---|---|
| Payment becomes due | Accounts Receivable $9,000 | Contract Liability $9,000 |
| Part of the receivable is collected | Cash $6,000 | Accounts Receivable $6,000 |
| Qualifying service is completed | Contract Liability $3,000 | Service Revenue $3,000 |
| Cancelled unperformed portion is refunded | Contract Liability $1,000 | Cash $1,000 |
At the due date, neither cash nor revenue changes. Collection settles part of the receivable without creating another liability. Performance reduces the liability and creates revenue. Refunding the cancelled portion reduces the obligation under the supplied facts; Cedar earns nothing from unprovided service.
Reconcile the balances
| Account | Opening | Increases | Decreases | Ending |
|---|---|---|---|---|
| Cash | $0 | $6,000 collection | $1,000 refund | $5,000 |
| Accounts Receivable | $0 | $9,000 due | $6,000 collection | $3,000 |
| Contract Liability | $0 | $9,000 due before service | $3,000 performance and $1,000 refund | $5,000 |
| Service Revenue | $0 | $3,000 performance | $0 | $3,000 |
The debit balances total $8,000, and the credit balances total $8,000. The calculation model checks the entries and balances on each corpus build. The contract facts establish what each entry means; balanced arithmetic cannot establish an enforceable right or prove that service transferred.
Explain the result
Cedar holds $5,000 cash from this sequence, has a $3,000 unconditional customer claim, and reports a $5,000 contract liability. Revenue is $3,000. None of those amounts can replace another in the explanation.
Counting the collection as another addition to Contract Liability would count the same customer consideration twice. Crediting Revenue when the payment first became due would recognize service before the stipulated performance occurred. Netting the receivable against the liability would conceal the separate right required by ASC 606-10-45-1.
Try the independent payment-before-service practice with different amounts before consulting its worked answer.
Verified calculation · journal entry
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- accounts
- 4 fields
Inspect data
{
"accounts_receivable": {
"classification": "asset",
"opening": 0
},
"cash": {
"classification": "asset",
"opening": 0
},
"contract_liability": {
"classification": "liability",
"opening": 0
},
"service_revenue": {
"classification": "revenue",
"opening": 0
}
}- entries
- 4 items
Inspect data
[
{
"label": "unconditional customer payment becomes due",
"lines": [
{
"account": "accounts_receivable",
"credit": null,
"debit": 9000
},
{
"account": "contract_liability",
"credit": 9000,
"debit": null
}
]
},
{
"label": "part of the receivable collected",
"lines": [
{
"account": "cash",
"credit": null,
"debit": 6000
},
{
"account": "accounts_receivable",
"credit": 6000,
"debit": null
}
]
},
{
"label": "qualifying service completed",
"lines": [
{
"account": "contract_liability",
"credit": null,
"debit": 3000
},
{
"account": "service_revenue",
"credit": 3000,
"debit": null
}
]
},
{
"label": "cancelled unperformed portion refunded",
"lines": [
{
"account": "contract_liability",
"credit": null,
"debit": 1000
},
{
"account": "cash",
"credit": 1000,
"debit": null
}
]
}
]Recomputed result
| Measure | Value |
|---|---|
| accounts receivable | 3,000 |
| cash | 5,000 |
| contract liability | 5,000 |
| ending credit balances | 8,000 |
| ending debit balances | 8,000 |
| service revenue | 3,000 |
| total credits | 19,000 |
| total debits | 19,000 |
| trial balance difference | 0 |