Determine the transaction price. Kyber-Comm sells 1,000 CDs to a distributor for $10 per product subject to various price concessions on a 90-day credit term. Control of the CDs is transferred to the distributor on the delivery date. Kyber-Comm has limited experience and minimal access to other evidence that enables it to estimate the amount of the price concessions. Prices are highly volatile and the price uncertainty will not be resolved until 90 days’ time. The risk of technological obsolescence of the entity’s product within a short duration is high. Furthermore, there is a large number and broad range of possible consideration amounts. Historically, Kyber-Comm has granted price concessions ranging from 20% to 60%. Based on its pricing strategy and cost structure, it is highly unlikely that Kyber-Comm would reduce the price to below $5 per product. Using the expected value approach, Kyber-Comm estimates the transaction price to be $7,000. Choose one CORRECT answer.

a. Since the weighted average price of all expected outcomes is reliably estimated at $7,000, Kyber-Comm should include this amount of the variable consideration in the transaction price. Accordingly, the revenue of $7,000 should be recognized on the date control of the goods is transferred to the customer.

b. The minimum amount of $5,000 should be included in the transaction price only once the uncertainty associated with the variable consideration has been resolved. Given the payment for the goods and thus finalization of the price concession will take place in 90- days’ time, no revenue should be recognized on the date control of the goods is transferred to the customer.

c. The facts and circumstances surrounding the sale indicate that changes in the transaction price could result in a significant revenue reversal and thus Kyber-Comm should not include the full $7,000 in the transaction price. Accordingly, revenue of $5,000, being the minimum amount that Kyber-Comm expects to receive, should be recognized on the date control of the goods is transferred to the customer.

d. Assuming Kyber-Comm and the customer negotiated a final 40% discount on the goods sold one month before the payment due date (i.e. two months after control of the goods transferred to the customer), Kyber-Comm should recognize $6,000 as revenue in one go only on the date the discount is finalized.

Answer rating: 100% (QA)

Option D is correct Assuming KyberComm and the customer negotiated a final 40 dis... View the full answer