FAR · Select transactions · 8 practice questions
ASC 606: Over Time vs. Point-in-Time Revenue Recognition
Revenue is recognized over time when any one ASC 606 criterion is met, but the no-alternative-use criterion also requires an enforceable right to payment. Below: follow the decision tree to separate over-time recognition from recognition when control transfers.
Try one first
Hint
Focus on whether any ASC 606 over-time criterion is met; legal title is relevant, but it is not always the deciding factor.
Answer C. ASC 606 permits over-time revenue recognition when an entity meets at least one over-time criterion. Here, the asset being created has no alternative use to BuildCo and the contract provides an enforceable right to payment for costs incurred plus a reasonable profit for work performed to date. Those facts support recognizing revenue over time as BuildCo performs, even though legal title transfers only on final delivery.
Why not A: A fixed price and probable collectibility establish the contract, but they do not mean the performance obligation is satisfied at inception. Revenue follows satisfaction of the performance obligation, which here occurs over time.
Why not B: Tempting because title/possession often indicate point-in-time control, but ASC 606 over-time criteria override that when met. Since the contract qualifies for over-time recognition, revenue is not delayed until delivery.
Why not D: Billing or cash collection timing does not determine recognition under ASC 606. Recognition depends on transfer of control (or meeting an over-time criterion), not on when invoices are issued or cash is received.
Decide it in order
T1Does the customer simultaneously receive and consume the benefits as the entity performs?
YesRecognize revenue over time. This criterion alone is sufficient.NoGo to T2T2Does performance create or enhance an asset the customer controls as it is created or enhanced?
YesRecognize revenue over time. Customer control during creation or enhancement is sufficient.NoGo to T3T3Does the asset have no alternative use because of substantive, enforceable contractual restrictions or practical limits on redirection?
YesGo to T4NoRecognize revenue at a point in time when control transfers. None of the over-time criteria is met.T4If the customer cancels for reasons other than the entity's nonperformance, is payment for completed performance, including a reasonable profit, enforceable?
YesRecognize revenue over time. Both no alternative use and the enforceable payment right are present.NoRecognize revenue at a point in time when control transfers. No alternative use alone is insufficient.
Key points
- Remember: One criterion is enough, but the no-alternative-use route requires both no alternative use and enforceable payment rights.
- No alternative use can reflect substantive, enforceable contractual restrictions on redirection or practical limits, including significant rework or economic loss.
- Costs plus a reasonable profit support payment for completed performance; cost reimbursement alone fails in these machine contracts.
- A logo or color change alone generally does not prevent redirection to another customer.
How the exam traps you
- Choosing over time because customization prevents alternative use. Also require an enforceable right to payment for completed performance, generally costs plus a reasonable profit.
- Waiting for delivery because legal title and physical possession transfer then. Test the over-time criteria first. Later title transfer does not defeat a criterion already met.
- Treating progress billings or a nonrefundable deposit as proof of over-time recognition. Billing and deposits do not replace the over-time criteria or establish the required payment right by themselves.
Question 2
Hint
Focus on the ASC 606 criterion for over-time recognition that applies when work is being performed on the customer's property.
Answer A. Under ASC 606, a performance obligation is recognized over time if one of the over-time criteria is met. One such criterion is that the customer controls the asset as it is created or enhanced. Because the addition is being built on the customer's land and the customer can direct design changes during construction, Ridge meets the control-based criterion and should recognize revenue over time.
Why not B: Transfer of legal title at final acceptance is a common indicator of a point-in-time transfer, so this distractor is tempting. However, title passing later does not preclude over-time recognition if the customer nonetheless controls the asset during construction (for example, it's on the customer's land and the customer can direct changes).
Why not C: Billing frequency and invoicing are payment or cash-flow matters and do not determine revenue recognition timing under ASC 606. Revenue depends on transfer of control (or meeting an over-time criterion), not the invoicing schedule.
Why not D: A long contract may often be recognized over time, but contract duration by itself is not a specified over-time criterion. The entity must meet one of ASC 606's criteria (such as customer control of the asset during performance) for over-time recognition.
Question 3
Hint
Focus on the fact that determines when control passes from seller to customer, not on contract signing or cash receipt.
Answer D. Under ASC 606, revenue is recognized when control of the goods transfers to the customer. With FOB shipping point terms, control generally passes to the buyer when the seller ships the goods. Because Arden has no remaining performance obligations or acceptance/return provisions and collectibility is probable, revenue is recognized on December 29, Year 1.
Why not A: This reflects a cash-basis shortcut. Under ASC 606, the revenue recognition trigger is transfer of control, not cash collection; cash receipt affects cash flow and receivables, not the timing of revenue when control has passed.
Why not B: This choice is tempting because candidates often equate revenue recognition with physical receipt, but FOB shipping point indicates the buyer obtains control at shipment; receipt would be the correct trigger under FOB destination terms, not here.
Why not C: Signing the contract establishes enforceable rights and fixed price, but it does not by itself satisfy the performance obligation. Revenue requires transfer of control, which occurred at shipment in this fact pattern.
Question 4
Hint
For the over-time criterion tied to customized assets, ask whether both required elements are present, not just one.
Answer D. ASC 606 permits over-time recognition when the asset has no alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. Contract 1 meets both requirements because Falcon cannot redirect the asset and is contractually entitled to costs plus a reasonable profit if the customer cancels. Contract 2 fails the enforceable-right-to-payment requirement because reimbursement only for purchased raw materials does not compensate Falcon for performance completed to date (labor and profit are not recovered), so revenue is recognized at a point in time.
Why not A: This choice focuses only on the 'no alternative use' element. Under ASC 606 that element alone is insufficient for over-time recognition, the entity must also have an enforceable right to payment for performance completed to date, which Contract 2 does not provide.
Why not B: While lack of customer control during production can point away from the 'customer controls asset as created' criterion, over-time recognition can still be met via the 'no alternative use + enforceable right' route. Contract 1 qualifies under that route.
Why not C: This distractor incorrectly treats any termination clause as dispositive. What matters is whether the termination terms give an enforceable right to payment that compensates for performance completed to date. Contract 1's termination provision does that; Contract 2's does not.
Question 5
Hint
Focus on the ASC 606 criteria for recognizing revenue over time, not on billing or title alone.
Answer D. ASC 606 permits recognizing revenue over time when one of the over-time criteria is met. The applicable third criterion is that the asset being created has no alternative use to the seller and the seller has an enforceable right to payment for performance completed to date. The contract language allowing Titan to recover costs plus a reasonable profit if Orion cancels (except for Titan's nonperformance) demonstrates that enforceable right and supports over-time recognition.
Why not A: This is tempting because billing often accompanies long-term contracts, but invoicing or progress billings alone do not determine when control transfers. Revenue recognition depends on whether an over-time criterion is met, not on whether the seller issues progress bills.
Why not B: Transfer of title can be an indicator of control at a point in time, but it is not dispositive if an over-time criterion is met. Here, the no-alternative-use plus enforceable-right-to-payment facts are more directly controlling for over-time recognition.
Why not C: This distractor is attractive because profitability affects measurement of progress, but expected profit or the relationship of costs to the transaction price does not determine timing. Profitability influences measurement, not whether recognition should be over time versus at a point in time.
Question 6
Hint
Follow ASC 606's sequence: identify the performance obligation first, then decide timing; separate factors that affect 'when' from those that affect 'how much.'
Answer C. ASC 606 first requires identifying whether promised goods and services are distinct or a single combined performance obligation; the facts (custom specifications, significant integration, inability to use the equipment apart from Nova's work) support a single obligation. The next step is whether that obligation is satisfied over time, here supported by the asset's no-alternative-use and the contract's enforceable right to payment for performance completed to date (reimbursement plus profit on cancellation). That two-step determination drives the timing of revenue; items like bonuses, retainage, and billing affect measurement.
Why not A: Acceptance provisions and retainage can be indicators of when control transfers, which makes this choice tempting. However, when the no-alternative-use and enforceable-right criteria for over-time recognition are met, they are the primary determinants of timing; retainage and testing affect measurement or provide supporting evidence but do not automatically override the over-time criteria here.
Why not B: This distractor is tempting because the bonus is variable consideration, but variable consideration primarily affects the transaction price (how much revenue to recognize) and may be estimated or constrained under ASC 606. It does not by itself determine whether a performance obligation is satisfied over time or at a point in time.
Why not D: Progress billings can suggest a financing component, which is tempting because it affects how the transaction price is allocated and whether interest is recognized. However, a significant financing component impacts measurement and allocation, not the fundamental assessment of whether a performance obligation is satisfied over time versus at a point in time.
Question 7
Hint
First determine the cumulative revenue that should be recognized by the end of Year 2 after the bonus becomes includable, then subtract the revenue already recognized in Year 1.
Answer A. Able recognized $150,000 in Year 1 (50% of the initial $300,000). When the $60,000 bonus became includable in Year 2, the transaction price increased to $360,000 and a cumulative catch-up is required for an over-time obligation. Cumulative revenue at December 31, Year 2 is 80% × $360,000 = $288,000, so revenue recognized in Year 2 is $288,000 − $150,000 = $138,000.
Why not B: This equals the incremental 30% progress on the updated $360,000 (0.30 × $360,000) but treats the bonus as affecting only Year 2's incremental progress. It fails to apply the cumulative catch-up that adjusts revenue for the portion completed in Year 1.
Why not C: This equals the incremental 30% progress on the original $300,000 (0.30 × $300,000) and ignores that the bonus became part of the transaction price, so it understates Year 2 revenue.
Why not D: This is the cumulative revenue that should be recognized through December 31, Year 2 (80% of $360,000), not the amount earned in Year 2 alone. The question asks for Year 2 revenue only.
Question 8
Hint
Focus on whether the customer obtains control of the asset during construction or only at the end.
Answer A. Under ASC 606, revenue is recognized over time when the customer controls the asset as it is created or enhanced by the entity. Here, the warehouse is being built on the customer's land, so the customer controls the asset during construction. Builder can reliably measure progress using the cost-to-cost method, collectibility is probable, and there are no complicating factors, so revenue should be recognized over time based on progress toward completion.
Why not B: This is tempting because candidates often associate revenue with final delivery or formal acceptance. However, when the customer controls the asset during construction (an over-time criterion under ASC 606), waiting until completion would inappropriately delay revenue recognition.
Why not C: This distractor confuses billing timing with satisfaction of the performance obligation. In ASC 606, revenue recognition depends on transfer of control and satisfaction of the performance obligation, not on when invoices are issued.
Why not D: This choice reflects a cash-basis view; under accrual-based GAAP, cash collection is not the revenue trigger when collectibility is probable. The relevant test is transfer of control during performance, not receipt of cash.
Common questions
Is no alternative use enough for over-time revenue recognition?
No. That criterion also requires an enforceable right to payment for performance completed to date. If the payment requirement fails, check the other two criteria before concluding that recognition occurs at a point in time.
Does cost reimbursement create an enforceable right to payment under ASC 606?
Cost reimbursement alone fails the payment test in these machine contracts. Payment for completed performance generally must compensate the seller for costs incurred plus a reasonable profit, not merely reimburse materials or production costs.
Can revenue be recognized over time if title transfers at delivery?
Yes. Any one over-time criterion is sufficient, even when title and possession transfer later. A customized machine with no alternative use and an enforceable right to payment for completed performance qualifies.
Watch it solved
A full CPA FAR task-based simulation on Revenue recognition, worked step by step.
FAR Simulation: Revenue Allocation, Timing and Warranties ASC 606 on YouTube
Practice FAR like the real exam
The free ChatCPA simulator: real exam layout, timed testlets, starting with a question on this topic. No account needed to start.
Open the free simulator →More on Revenue recognition
Questions from the ChatCPA bank of 17,658 CPA exam questions, each with a written reason for every wrong answer. ChatCPA is built by Nicholas Miller, CPA (Oregon #14907). How these pages are made. Spot an error? Tell us.