As winter was approaching, Kendall’s Carpentry Company finished the framing and “drying-in” a new lake house for Dave Hampton, one of the company’s clients, who accepted the work as complete and satisfactory. Hampton is building the lake house as a weekend and summer retreat for himself and his family on a lot he bought for $18,000 last spring with some inheritance money. The keep construction costs to a minimum, Hampton decided to be his own general contractor.

Although the lot is fully paid for, the house must be financed. Because local lenders do not make loans to individuals on dwelling that are not yet habitable, Hampton has had to work out some short-term financing arrangements. He arranged with a building supply company to buy all the materials needed on a six-month note and has made similar arrangements with Kendall’s Carpentry Company for the labor. Now that the house is “dried-in,” Hampton plans to spend his winter weekends doing all the finishing work so that the house will be ready for use by late spring. Once the lake house is completed, Hampton intends to get a conventional mortgage on it for about $40,000 and use the proceeds to pay the notes to the building supply company and Kendall’s Carpentry.

The job required a total of 310 hours of labor, for which Kendall’s Carpentry usually bills $50 an hour on a cash basis (the workers are paid an hourly rate of $30). However, because of Hampton’s good credit rating, the company has agreed to take a non-interesting-bearing note in the face amount of $15,500 due in 6 months. Collateral for the note is a lien on the lake property (the same as on the note to the building supply company). Based on inquiries to its own bank and a few others, Kendall’s carpentry knows the note can be discounted with recourse for about $14,100 or without recourse for about $12,900.

From its own experience with similar notes, Kendall’s Carpentry believes the risk of loss from default is about 5 %. Also, the company changes a 12% annual discount rate.

 

Required:

How should Kendall’s Carpentry recognized the note receivable and the related service revenue? Base answer on the following accounting standards:

Revenue

Revenue earned by an entity from its direct distribution, exploitation, or licensing of a film, before deduction for any of the entity's direct costs of distribution. For markets and territories in which an entity's fully or jointly-owned films are distributed by third parties, revenue is the net amounts payable to the entity by third party distributors. Revenue is reduced by appropriate allowances, estimated returns, price concessions, or similar adjustments, as applicable.

The following definition is Pending Content; see Transition Guidance in 606-10-65-1.

Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

An entity shall disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of comprehensive income (statement of activities) in accordance with other Topics:

a. Revenue recognized from contracts with customers, which the entity shall disclose separately from its other sources of revenue

b. Any impairment losses recognized (in accordance with Topic 310 on receivables) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from impairment losses from other contracts.

 

55-3B Transition Date: (P) December 16, 2017; (N) December 16, 2018 Transition Guidance: 606-10-65-1 The collectibility assessment in paragraph 606-10-25-1(e) is partly a forward-looking assessment. It requires an entity to use judgment and consider all of the facts and circumstances, including the entity’s customary business practices and its knowledge of the customer, in determining whether it is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that the entity expects to transfer to the customer. The assessment is not necessarily based on the customer’s ability and intention to pay the entire amount of promised consideration for the entire duration of the contract.

Performance Obligation

The following definition is Pending Content; see Transition Guidance in 606-10-65-1

A promise in a contract with a customer to transfer to the customer either:

a. A good or service (or a bundle of goods or services) that is distinct

b. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Financing Receivable

A financing arrangement that has both of the following characteristics:

a. It represents a contractual right to receive money in either of the following ways:

1. On demand

2. On fixed or determinable dates.

b. It is recognized as an asset in the entity’s statement of financial position.

Answer rating: 100% (QA)

Based on the information provided Kendalls Carpentry should recognize the note receivable as a finan... View the full answer