FAR · Select transactions · 6 practice questions
ASC 606: Bill-and-Hold, Consignment, Agents, and Repurchases
Recognize revenue only when the customer obtains control of the promised good or service. Below, sort Apex's arrangements into sales, agent fees, deferred revenue, and non-sale accounting.
Try one first
Hint
Focus on who controls the inventory after delivery, not just on shipment, title, or when cash will be received.
Answer D. The facts (payment only after resale, dealer right to return unsold units, and Noll's ability to redirect or require return of inventory) point to a possible consignment arrangement. Under ASC 606 revenue is recognized only when control transfers to the customer; if control has not passed because the arrangement is a consignment, Noll should not recognize revenue on delivery. Thus the primary issue is whether control transferred or the arrangement is a consignment.
Why not A: Tempting because sellers may think production completion triggers revenue, but ASC 606 focuses on transfer of control to the customer rather than the seller's manufacturing status. Even if production is complete, revenue depends on whether the buyer obtained control.
Why not B: Collectibility matters for revenue recognition in some cases, but here the more immediate question is whether control passed at delivery. If the arrangement is a consignment, revenue is deferred regardless of later collectibility.
Why not C: Title and possession are indicators of control but are not conclusive on their own. When terms suggest a consignment, the overall transfer-of-control assessment under ASC 606, not just title/possession timing, determines revenue recognition.
Sort it
Apex is the principal, and control has transferred for the good or service being recognized.
Apex only arranges another party's transfer and has earned its fee.
Apex still controls the goods because the transfer requirements are unmet.
Repurchase terms preclude a sale and require lease or financing accounting.
| Item | Goes to |
|---|---|
| Apex holds finished goods because the customer's warehouse is unavailable. The customer requested the delay. The goods are identified for the customer, ready for transfer, and unavailable for Apex's use or redirection. Title has passed, and payment is due under normal terms. | Gross revenueAll bill-and-hold criteria are met. Customer control can precede physical shipment. |
| Apex delivers appliances to a dealer that pays only after resale and earns a fixed commission. Apex can require return or redirect the unsold appliances. | Defer sale revenueThis is a consignment. Apex retains control despite the dealer's physical possession. |
| Apex arranges a completed appliance sale by a vendor. It collects the customer's payment but never controls the appliance. | Net fee revenueApex arranged the transfer without controlling the appliance first. Only its earned commission is revenue. |
| Apex transfers equipment for $1,000,000. The customer holds a substantive put requiring Apex to repurchase it for $850,000; expected market value at the exercise date is $600,000. The arrangement is not a sale-leaseback. Assume the time value of money does not affect the price comparison. | Lease or financingThe put creates significant exercise incentive. Repurchase is below the original price, so this non-sale-leaseback arrangement is a lease. |
| Apex's customer-requested hold otherwise meets bill-and-hold criteria, but required final calibration and inspection remain unfinished. | Defer sale revenueThe goods are not ready for physical transfer. Meeting the other criteria does not cure that failure. |
| Apex's machine meets all bill-and-hold criteria. Its distinct storage service covers December through February; only December is complete at year-end. | Gross revenueRecognize machine revenue and December's allocated storage revenue. January and February storage revenue remains deferred. |
| Apex invoices ready tablets and passes title after a customer requests delayed delivery. No units are identified; Apex can fill other orders with them. | Defer sale revenueThe goods are neither separately identified nor protected from redirection. Invoicing and title do not establish control. |
| Apex delivers equipment that cannot function without significant installation customization. Installation and required customer acceptance are now complete; the customer obtains control. | Gross revenuePhysical delivery alone was insufficient. The combined equipment-installation obligation is satisfied when control transfers. |
| Apex delays shipment because its shipping capacity is constrained. Goods are identified, ready for transfer, and unavailable for Apex's use or redirection. | Defer sale revenueThe delay serves Apex, not a substantive customer reason. The bill-and-hold criteria are not met. |
| Apex's dealer sells a consigned appliance to an end customer who now controls it. The dealer retains only its fixed commission. | Gross revenueRevenue follows control transfer to the end customer, not earlier delivery to the dealer. |
| Apex funds a promotional discount from its commission and handles complaints on a completed vendor sale. It never controls the appliance before customer transfer. | Net fee revenueDiscounts and customer service do not establish control. Apex remains an agent and recognizes only its earned commission. |
| Apex has a forward obligation to repurchase equipment. The repurchase price equals the original selling price after considering time value of money. | Lease or financingThe forward prevents customer control. Repurchase at the original price requires financing accounting, not sale revenue. |
Key points
- Remember: Ask who controls the specified good, not who holds it or collects payment.
- Bill-and-hold needs a substantive customer request, identified goods, readiness for transfer, and no seller use or redirection.
- Pricing discretion, inventory risk, and fulfillment responsibility support the control test; none replaces it.
- A distinct storage service remains a separate performance obligation after the goods transfer.
How the exam traps you
- Recognizing bill-and-hold revenue because Apex invoiced the customer, passed title, or finished production. Check every bill-and-hold criterion. Invoicing, title, and production completion cannot replace identification, readiness, or restrictions on seller use.
- Treating cash collection, discounts, or customer service as proof that a platform is the principal. Determine whether the platform controls the specified good or service before transfer. An agent recognizes only its earned fee.
- Automatically treating a customer put below the original selling price as a lease. With significant exercise incentive, compare prices considering time value of money: below original generally means lease accounting; sale-leaseback requires financing.
Question 2
Hint
Start with the principal-agent control question under ASC 606; treat payment collection, pricing ability, inventory risk, and support activities as indicators to be weighed, not as the primary test.
Answer D. ASC 606's principal-versus-agent (gross-versus-net) decision is governed by whether the entity controls the specified good or service before transfer. Indicators of control include primary responsibility for fulfillment, inventory risk, and price-discretion; collection of payment, billing, and customer support are informative but not determinative. Therefore the primary question is whether RoomLink controls the hotel stay prior to transfer.
Why not A: This distractor tempts because collecting payment can look like the entity is the seller; however, cash collection alone does not establish control of the underlying good or service and so is not the principal test under ASC 606.
Why not B: Handling billing and customer support is a tempting signal of being the principal, but these are common agent activities and are not determinative of control; they must be weighed alongside indicators like primary fulfillment responsibility and inventory risk.
Why not C: This option is appealing because price discretion and inventory risk are important indicators of control, but their presence or absence must be considered with other factors. They do not alone determine gross-versus-net presentation unless they show RoomLink actually controls the promised good before transfer.
Question 3
Hint
First decide how many performance obligations there are, then determine whether each one is satisfied in 20X5 or over a longer period.
Answer D. Equipment and installation are not distinct and are combined into one performance obligation. Allocate the $165,000 by relative standalone selling prices (equipment+installation = $150,000 of the $180,000 total STSP → $137,500 allocated; training = $27,500). Control of the combined equipment-installation PO transfers on January 31, 20X6, so none of the $137,500 is recognized in 20X5. Training is distinct and earned evenly over six months, so recognize 3/6 of $27,500 = $13,750 in 20X5.
Why not A: This reflects combining equipment and installation but recognizing that combined amount at delivery ($137,500) plus half the training ($13,750). It is wrong because the contract specifies control transfers only after installation and acceptance on January 31, 20X6, so the combined amount is not recognized in 20X5.
Why not B: Tempting because $27,500 is the amount allocated to training, but it is wrong: training is provided evenly over six months (Oct-Mar), so only three months fall in 20X5, i.e., half of $27,500 is recognized in 20X5.
Why not C: This reflects treating the equipment-installation as separate POs and recognizing the equipment portion when delivered (allocated equipment = $110,000) plus half the training ($13,750 → total $123,750). It is incorrect because equipment and installation are not distinct and the combined obligation's revenue is deferred until installation and acceptance in 20X6.
Question 4
Hint
For principal-versus-agent questions, separate the overall ASC 606 principle from the indicators that merely help apply it.
Answer C. ASC 606's principal-versus-agent assessment is decided by whether the entity controls the specified good or service before it is transferred to the customer. StreamSeat merely arranges for the venue to provide admission and never obtains control of the admission right prior to the customer, so it reports only its net fee. The other facts (inventory risk, price-setting, primary fulfillment responsibility) are supporting indicators that help apply the control test but are not the governing principle.
Why not A: Price-setting discretion can indicate principal status, making this a plausible distractor. But lack of control over price alone does not determine gross versus net presentation, the control analysis is the governing factor.
Why not B: Inventory risk is a well-known indicator of principal status, so this option is tempting. However, ASC 606 treats inventory risk as supporting evidence rather than the decisive test; the primary question is whether the entity controls the good or service before transfer.
Why not D: Being primarily responsible for fulfillment is another indicator pointing toward principal status, so this choice is attractive. Still, that is only an indicator used to assess control; it does not replace the control-based principal-versus-agent test.
Question 5
Hint
Ask which single question ASC 606 poses for principal versus agent; view inventory risk, pricing, and fulfillment as supporting evidence rather than the primary test.
Answer C. ASC 606's principal-versus-agent assessment is governed by whether the entity controls the specified good or service before transfer. Indicators such as inventory risk, pricing discretion, and fulfillment responsibility provide evidence about control, but they are not the controlling test themselves. Therefore the central question is control prior to transfer when deciding gross versus net presentation.
Why not A: Pricing discretion can suggest an entity captures the benefits of a transaction and therefore might be the principal, Palisade's funding of promotions makes this attractive. But pricing power is only one indicator used to assess whether the entity controls the good or service and is not the primary ASC 606 test.
Why not B: Inventory risk is a classic indicator of principal status and is tempting because bearing risk often aligns with control; given Palisade doesn't take legal title, candidates may focus here. However, ASC 606 treats inventory risk as supporting evidence of control rather than the governing question, so it cannot by itself determine gross versus net presentation.
Why not D: Being primarily responsible for fulfillment is persuasive evidence of principal status and tempting because Palisade provides customer service. Nonetheless, fulfillment responsibility alone does not replace the central ASC 606 inquiry, whether the entity controls the specified good or service before transfer.
Question 6
Hint
Focus on whether the customer controls specific goods at year-end, not just on invoicing, title passage, or readiness for shipment.
Answer B. Under ASC 606, bill-and-hold revenue may be recognized before shipment only if the goods are specifically identified to the customer and the seller does not have the ability to use or direct the goods to another customer. Here, although title passed and the customer requested a delay, RetailCo did not set aside specific units and can use identical tablets to fill other orders, so control has not transferred and revenue should be deferred at year-end.
Why not A: This is tempting because passing title and a customer-requested delay are relevant, but they are insufficient alone. Bill-and-hold recognition also requires the goods to be identified to the customer and unavailable for the seller's alternative use, which is not true here.
Why not C: Being complete and ready for shipment is necessary but not sufficient for bill-and-hold recognition. Because the specific units were not set aside and can be used to satisfy other orders, control has not transferred.
Why not D: This confuses receipt of cash with transfer of control. Under ASC 606, revenue depends on whether control of the promised goods or services transfers to the customer, not on cash collection. Since control has not transferred, cash receipt alone does not justify revenue recognition.
Common questions
Can bill-and-hold revenue be recognized before shipment?
Yes, if control has transferred and all bill-and-hold criteria are met. The delay needs a substantive customer reason; goods must be identified, ready for transfer, and unavailable for seller use or redirection.
Does collecting customer payments make a platform the principal?
No. Gross versus net depends on control of the specified good or service before transfer, not cash collection, pricing discretion, or customer support alone.
When does a customer repurchase option prevent a sale under ASC 606?
A customer put prevents a sale when exercise offers significant economic incentive. A repurchase price below the original selling price, considering time value of money, generally requires lease accounting; a sale-leaseback instead requires financing.
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