ACC 610 Module 3 Milestone One Example

Revenue Recognition for the Cooperative Fleet Contract

[Student Name]

Southern New Hampshire University

ACC 610: Financial Reporting I

Milestone One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Revenue Recognition for the Cooperative Fleet Contract

Introduction

In February 2025 the company signed its largest contract to date with a western Kansas farm cooperative that wanted to offer drone spraying to its members. For a fixed price of $560,000, the company promised 12 spraying drones, 36 months of its mapping subscription for each drone, a two-week training course for 12 cooperative pilots and 2,000 acres of spraying by the company's own contracted pilots during the 2025 season while the cooperative's pilots gained experience. The cooperative paid $280,000 at signing and $280,000 on delivery of the drones in March. This milestone walks the contract through the five ASC 606 steps to find the 2025 revenue figure and what remains on the balance sheet at year end (Financial Accounting Standards Board, 2014).

Step 1: Identify the Contract

ASC 606-10-25-1 requires that the parties have approved the contract, rights and payment terms can be identified, the contract has commercial substance and collection is probable. All are met: both parties signed, the terms specify each deliverable and the payments, the exchange changes both parties' cash flows and the cooperative has a strong credit history and paid in full.

Step 2: Identify Performance Obligations

ASC 606-10-25-19 through 25-21 treat each promise as its own obligation only when two tests hold: the customer could benefit from it alone or with resources it can readily obtain, and the promise can be separated from the others in this contract. The drones are sold separately and work without the subscription for manual flight. The subscription adds field mapping and prescription maps; the company sells it separately to owners of its drones and of competing models. Training is available from independent flight schools. Spraying is sold separately through the company's app. None of the promises significantly modifies or customizes another, and the company is not integrating them into a combined output, so each is separately identifiable. The contract has four performance obligations. Kieso et al. (2019) note that the separately identifiable judgment is often the hardest one; here the fact that each item is routinely sold alone makes it straightforward.

Step 3: Determine the Transaction Price

The cooperative's fixed payments total $560,000. The contract also gives the cooperative a $15,000 credit if fleet uptime during the 2025 season falls below 92 percent. Because the outcome is binary, the most likely amount method fits (ASC 606-10-32-8). The company's fleet uptime has been 97 percent or better in each of its three seasons, so the most likely credit is zero, and including the full $560,000 is not expected to cause a significant revenue reversal under the constraint in ASC 606-10-32-11. There is no significant financing component, because all payments fall within a month of delivery.

Step 4: Allocate the Transaction Price

Standalone selling prices are observable for three items and estimated for one. The ratio of contract price to total standalone price is $560,000 divided by $674,800, or 0.82988.

Relative standalone selling price allocation

The $114,800 discount is allocated proportionally because nothing in the contract or the company's pricing practice suggests it relates to any one item (ASC 606-10-32-36 and 32-37). Training standalone price was estimated from the fees two Kansas flight schools charge for comparable courses, adjusted for the company's own drone-specific content.

Step 5: Recognize Revenue

The drones are a point-in-time obligation; control transferred on delivery in March 2025 when the cooperative accepted them, took title and began using them (ASC 606-10-25-30). The subscription is satisfied over time from activation on April 1, 2025, because the cooperative receives and consumes the benefit as the company provides access (ASC 606-10-25-27); a straight-line method fits, $3,983 a month. Training was delivered over two weeks in March and is fully recognized. Spraying is satisfied over time as acres are covered, measured by acres sprayed; all 2,000 acres were completed by September.

Revenue recognized in 2025 and contract liability at December 31

Because the full $560,000 was collected, the remaining $107,551 is a contract liability, of which $47,801 relates to the next 12 months and is current and $59,750 is noncurrent.

Contract Costs

The sales representative earned a 4 percent commission, $22,400, only because the contract was signed. ASC 340-40-25-1 requires an asset for a cost incurred only because a contract was won, provided the company expects to recover it. The commission should be amortized on a basis consistent with the transfer of the goods and services to which it relates. The portion relating to the subscription, $5,736 based on its share of the allocated price, is amortized over 36 months, $1,434 in 2025; the remaining $16,664 relates to obligations fully satisfied in 2025 and is expensed. The contract cost asset at year end is $4,302.

Journal Entries

At signing, cash of $280,000 is debited and a contract liability credited. On delivery, cash of $280,000 is debited, the contract liability for the drones and training is reduced and revenue of $393,361 recognized, with cost of goods sold of $258,000 for 12 drones at $21,500. Monthly, $3,983 moves from the contract liability into subscription revenue, and spraying revenue is recognized as acres are covered, with pilot payments in cost of services.

Judgments a Reviewer Would Test

Three judgments would draw an auditor's attention. The first is the training standalone selling price, the only estimated one; if it were $24,000 rather than $18,000, training would receive about $4,900 more and the other obligations correspondingly less, with almost no effect on 2025 revenue because both training and most other items are recognized in the same year. The second is the uptime constraint. If the company had only one season of history, a zero estimate would be harder to defend, and the expected value approach, or recognizing the $15,000 only when uptime is known, would be more prudent. The third is the subscription start date. The company begins recognition at activation, April 1, rather than at delivery in March, because the cooperative could not use the mapping service until accounts were set up; the cooperative's activation records support that date.

Disclosure and Next Steps

The notes should describe the four performance obligations, the significant judgments on standalone selling prices and the uptime credit, the contract liability balances and the transaction price allocated to remaining performance obligations, $107,551, expected to be recognized over the next 27 months (ASC 606-10-50-13). Napier and Stadler (2020) found that the revenue standard's main effects were on disclosure and internal processes rather than reported totals, which matches this contract. Milestone Two will test the company's long-lived assets and goodwill for impairment.

References

Financial Accounting Standards Board. (2014). Revenue from contracts with customers (Topic 606) (Accounting Standards Update No. 2014-09). Author.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.

Napier, C. J., & Stadler, C. (2020). The real effects of a new accounting standard: The case of IFRS 15 Revenue from Contracts with Customers. Accounting and Business Research, 50(5), 474-503. https://doi.org/10.1080/00014788.2020.1770933