Related questions with answers
Assume McDonald’s enters into a contract to sell Billy Bear dolls for Toys4U Stores. Based on the contract, McDonald’s displays the dolls in selected stores. Toys4U is not paid until the dolls have been sold by McDonald’s, and unsold dolls are returned to Toys4U. Required: Determine whether Toys4U has satisfied its performance obligation when it delivers the dolls to McDonald’s. Explain your answer.
Solutions
VerifiedNo, although McDonald's does have physical possession of the asset, (1) there is no obligation to pay Toys4U, (2) legal title has to pass, (3) risks and rewards of ownership has not transferred. Toys4U still retains ownership of the goods.
With regard to recognizing revenue upon delivery or revenue recognition at a single point in time, the performance obligation is satisfied when control has been transferred. Since it has yet to be transferred in this case, Toys4U has not satisfied its performance obligation when it delivers the dolls. No revenue should be recognized upon delivery. Refer to page 238 for more details.
In this exercise, we are to determine whether or not the performance obligation was satisfied by the delivery of the goods of the company.
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