Question

Holt Industries received a $1,800 prepayment from the Ramirez Company for the sale of new office furniture. Holt will bill Ramirez an additional $2,900 upon delivery of the furniture to Ramirez.

Upon receipt of the $1,800 prepayment, how much should Holt recognize for a contract asset, a contract liability, and accounts receivable?

Answer 1

Holt Industries should recognize $1,800 as accounts receivable and $2,900 as a contract liability. No contract asset should be recognized in this scenario.

Step-by-step explanation:

To determine how much Holt Industries should recognize for a contract asset, a contract liability, and accounts receivable, we need to analyze the transaction:

1. The prepayment of $1,800 is received from Ramirez Company, so Holt Industries would recognize this as accounts receivable since it represents the amount owed by Ramirez.
3. The additional $2,900 that will be billed upon delivery of the furniture is a future obligation that Holt Industries has to Ramirez Company. This creates a contract liability because Holt Industries is obligated to provide the furniture and will invoice Ramirez for the remaining amount.
4. No contract asset would be recognized in this scenario since the prepayment is in the form of cash received. A contract asset is typically recognized when a company has a right to receive consideration before transferring goods or services.

Answer 2

- Contract asset: $1,800

- Contract liability: $0

- Accounts receivable: $1,800

Step-by-step explanation:

Holt Industries received a prepayment of $1,800 from the Ramirez Company for the sale of new office furniture. This $1,800 represents a contract liability, as Holt hasn't yet delivered the furniture.

Once Holt delivers the furniture and bills Ramirez an additional $2,900, it will recognize the remaining revenue as an accounts receivable. At the moment of receiving the prepayment, Holt should recognize the $1,800 as a contract asset, representing the amount it's entitled to from the prepayment but hasn't yet earned through delivery.

The $1,800 represents the consideration received from Ramirez, creating a contract asset under Accounting Standards Codification (ASC) 606. This standard requires entities to recognize revenue when control of goods or services is transferred to the customer.

The initial payment from Ramirez signifies their commitment to the contract, warranting the recognition of the contract asset. Upon fulfilling the contract terms by delivering the furniture, Holt will then transfer the remaining furniture's value ($2,900) to an accounts receivable and recognize the corresponding revenue.