FAR · Select transactions · 6 practice questions
ASC 606 Relative Standalone Selling Price Allocation Example
Allocate a bundle's transaction price by relative standalone selling prices, then recognize each obligation's revenue when or as it is satisfied. Below: a worked allocation followed by equipment delivery and maintenance revenue calculations.
Try one first
Hint
First decide whether there is more than one performance obligation. Then allocate the contract price using relative standalone selling prices before deciding what is recognized on January 1.
Answer A. The equipment and maintenance are separate performance obligations, so allocate the $110,000 transaction price by relative standalone selling prices. Total standalone price = $100,000 + $20,000 = $120,000. Equipment allocation = $110,000 × ($100,000 ÷ $120,000) = $91,667, recognized when control of the equipment transferred on January 1.
Why not B: This is the equipment's standalone selling price, but the contract price for the bundle was $110,000 (a discount), and that discounted price must be allocated across the separate obligations.
Why not C: Tempting if a candidate recognizes the full cash received on delivery, but part of the price relates to the separate maintenance obligation and must be deferred and recognized over time.
Why not D: This reflects incorrectly subtracting the maintenance's standalone price ($20,000) from the bundle price; ASC 606 requires allocation by relative standalone selling prices, not simple subtraction.
Worked example
On July 1, Year 1, Vale Co. collects $64,000 for equipment and 12 months of maintenance. Both are distinct obligations. Standalone prices are $66,000 and $22,000. Equipment control transfers July 1. Maintenance is provided evenly through June 30, Year 2. There is no variable consideration or financing component. Calculate Year 1 revenue and the December 31 contract liability.
| 1 | Identify obligations and total SSPEquipment SSP $66,000 + maintenance SSP $22,000 | $88,000 |
| 2 | Compute allocation ratiosEquipment: $66,000 ÷ $88,000; maintenance: $22,000 ÷ $88,000 | Equipment 75%; maintenance 25% |
| 3 | Allocate and recognize equipment revenue$64,000 × 75%; control transferred July 1 | $48,000 |
| 4 | Allocate the maintenance portion$64,000 × 25% | $16,000 |
| 5 | Recognize six months of maintenance$16,000 × 6/12 | $8,000 |
| 6 | Total Year 1 revenue$48,000 + $8,000 | $56,000 |
| 7 | December 31 contract liability$64,000 cash received - $56,000 revenue recognized | $8,000 |
Vale recognizes $56,000 of Year 1 revenue and reports an $8,000 contract liability at December 31.
Check: Six of 12 months means half: $48,000 equipment + half of $16,000 maintenance = $56,000 revenue.
Key points
- An upfront setup fee enters the transaction price; setup is not a separate obligation if it transfers no good or service.
- Include variable consideration only when it is probable that a significant revenue reversal will not occur.
- Allocate a bonus or discount entirely to one obligation only when ASC 606's specific allocation criteria are met.
- A contract asset reflects earned consideration with a conditional payment right; an unconditional payment right is a receivable.
How the exam traps you
- Recognize the equipment's standalone price, or subtract maintenance's standalone price from the bundle. Allocate the actual transaction price using each obligation's share of total standalone selling prices.
- Allocate every bonus proportionally without checking what it relates to. Test the constraint and specific allocation criteria before assigning variable consideration.
- Recognize all cash at delivery, or defer all service revenue until the contract ends. Recognize delivered equipment plus service revenue earned through the measurement date.
Question 2
Hint
Focus on the rule that limits when estimated variable consideration can be included in the transaction price.
Answer A. Under ASC 606, variable consideration is included in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty is resolved. Here, Orion cannot make that conclusion at contract inception, so the bonus is constrained and excluded initially. The fixed fee is not automatically excluded just because the bonus is uncertain.
Why not B: Estimation of variable consideration is required, but estimation alone is not sufficient. Because Orion cannot conclude that including the bonus is probable to avoid a significant revenue reversal, the bonus must be constrained and excluded.
Why not C: This is overly conservative. The variable bonus is constrained, but the fixed fee can still be recognized if the other revenue recognition criteria are met; uncertainty about the bonus does not automatically delay recognition of the fixed consideration.
Why not D: ASC 606 limits inclusion of variable consideration based on the probability of significant reversal, not on cash receipt. Requiring cash receipt would conflate collectibility with the variable-consideration constraint and is not generally required.
Question 3
Hint
Start by identifying which promised items are actual performance obligations and which activities are only setup. Then allocate the total contract consideration based on standalone selling prices before deciding what is recognized on day 1.
Answer C. The $120 activation fee is part of the contract's transaction price, but the activation activity itself is not a separate performance obligation because it does not transfer a distinct good or service. Total transaction price is $1,080 ($120 + $80 × 12), and it is allocated to the handset and service based on their standalone selling prices of $300 and $960, respectively. The handset therefore receives $1,080 × $300 / $1,260 = $257.14 of allocated consideration, which is recognized when control of the handset transfers at inception.
Why not A: This reflects the mistake of treating a nonrefundable upfront fee as automatically earned when collected. The activation activity is not a distinct performance obligation, so the fee is included in the transaction price and allocated; it is not recognized in full at inception simply because it is nonrefundable.
Why not B: This is tempting because the handset is delivered immediately and the activation fee relates to setup. However, ASC 606 requires the full transaction price (including nonrefundable upfront fees that are not separate obligations) to be allocated to the identified performance obligations based on standalone selling prices. Because the total contract consideration is less than the sum of standalone selling prices, the handset's recognized amount is less than its $300 standalone price.
Why not D: This overgeneralizes the non-distinct setup rule. The stem states the handset and monthly service are separate performance obligations and the handset transfers at inception, so an allocated portion of the transaction price must be recognized at that time.
Question 4
Hint
First allocate the fixed $120,000 by relative standalone selling prices; then apply the stated allocation of the $15,000 bonus. Recognize amounts for obligations satisfied on or before January 20 (the support period begins after that date).
Answer C. Allocate the fixed $120,000 by relative standalone selling prices: license = (90/150)*120 = $72,000; installation = (30/150)*120 = $24,000; support = (30/150)*120 = $24,000. The $15,000 bonus is allocated entirely to installation per the facts, so the installation obligation yields $24,000 + $15,000 = $39,000 when satisfied. By January 20, the license (transferred Jan 2) and installation (completed Jan 20) have been satisfied, so TechCo recognizes $72,000 + $39,000 = $111,000. The support period begins on January 21, so none of the $24,000 allocated to support is recognized as of January 20.
Why not A: This equals the fixed $120,000 allocated to license and installation (72,000 + 24,000) but excludes the $15,000 bonus. It is tempting if a candidate ignores the bonus, but the stem states the bonus was included in the transaction price and allocated to installation, so it is recognized when installation is completed.
Why not B: This reflects allocating the $15,000 bonus proportionately across all obligations and then recognizing the amounts for the two satisfied obligations. That is inconsistent with the stem, which specifies the bonus relates specifically to installation and is allocated entirely to that obligation.
Why not D: This would recognize the entire contract price immediately. That is incorrect because $24,000 of the fixed consideration is allocated to support and must be recognized over the 12‑month support period beginning January 21, not on or before January 20.
Question 5
Hint
First identify the actual performance obligations, then allocate the total transaction price to them before computing January revenue.
Answer A. The total transaction price is $1,200 (the $400 enrollment fee plus ten $80 monthly payments). Allocating by standalone selling prices ($200 for the kit and $1,000 for access) assigns $200 to the kit (recognized on January 1) and $1,000 to access recognized ratably at $100 per month. By January 31 revenue recognized is $200 (kit) + $100 (one month of access) = $300, and because cash collected is $480, the contract liability (consideration received in advance) is $480 − $300 = $180.
Why not B: This correctly treats the welcome kit as distinct but uses the $80 monthly billing amount to recognize access revenue instead of the $100 allocation based on standalone selling prices, understating January revenue.
Why not C: This treats all cash received on January 1 as immediately earned. Under ASC 606, the nonrefundable enrollment fee must be allocated to the identified performance obligations and deferred as appropriate, so not all collected cash is revenue on day 1.
Why not D: This spreads the entire transaction price evenly over ten months and therefore defers recognition of the distinct welcome kit transferred on January 1, understating immediate revenue.
Question 6
Hint
First allocate the contract price to each distinct performance obligation using standalone selling prices. Then determine how much of each obligation was satisfied by December 31.
Answer D. Allocate the $168,000 contract price based on relative standalone selling prices (total SSS = $210,000): machine = $120/210 × $168,000 = $96,000; training = $30/210 × $168,000 = $24,000; maintenance = $60/210 × $168,000 = $48,000. Recognize $96,000 on October 1 for the machine, 75% of training ($18,000) because 3 of 4 sessions were completed by December 31, and 3 months of maintenance (3/12 × $48,000 = $12,000). Total Year 1 revenue = $96,000 + $18,000 + $12,000 = $126,000.
Why not A: Tempting if a candidate recognizes only the machine transfer and defers all service revenue; incorrect because both training (3 of 4 sessions) and maintenance (3 of 12 months) were partially performed in Year 1 and should be recognized proportionally.
Why not B: This equals the machine ($96,000) plus three months of maintenance ($12,000) but ignores the portion of training performed. The training PO had 3 of 4 sessions completed, so 75% of the allocated $24,000 ($18,000) should also be recognized.
Why not C: This reflects recognizing the full allocated training amount in Year 1 along with machine and partial maintenance. That is incorrect because only 3 of 4 training sessions were delivered by year-end, so only 75% of the training allocation should be recognized.
Common questions
How do you allocate transaction price using relative standalone selling prices?
Multiply the transaction price by each obligation's standalone selling price divided by total standalone selling prices. Use this default method unless the facts support a specific allocation exception.
Is maintenance revenue recognized when the equipment is delivered?
No. Recognize the equipment allocation when control transfers and recognize evenly provided maintenance over the coverage period.
Can variable consideration be allocated entirely to one performance obligation?
Yes, if it relates specifically to that obligation and allocating it there meets the allocation objective. Include the amount only if it is probable that a significant revenue reversal will not occur.
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