Question:
Cutler Education Corporation developed a software product to help children under age 12 to learn
mathematics.
The software contains two separate parts: Basic Level (Level I) and Intermediate Level (Level II). The list
price of the software contains the access code only for Level I. Parents are eligible to purchase the access
code for a higher level only if their children pass an exam created by software. The accounting period
ends December 31.
Kerry purchases the software at a price of $50 for his child, Tom, on December 1, 2012. Suppose Tom
passed the Level I test on December 31, 2012, and Kerry immediately purchased the access code for
Level II part for Tom for an additional $10. Cutler licensed Level II to Kerry on the same day, December
31, but provides him the access code to Level II on January 10, 2013.
Required:
When would Cutler recognize revenue for the sale of Level I and II software?
Answer:
In this example, Kerry obtained the access code for Level I in the software on December 1, meaning that
Kerry has obtained the control of the right to use the software for Level I on that date. Therefore, on that
date Cutler should recognize $50 of revenue for Level I.
When Tom passed the Level I test on December 31, 2012, and purchased access to Level II, Cutler
licensed Level II to Kerry on the same day. However, Kerry received the access code for Level II on
January 10, 2013, so control over Level II in the software was not transferred to Kerry until January 10.
Therefore, Cutler should recognize $10 of revenue for Level II on January 10, 2013, rather than
December 31, 2012, because it did not satisfy a separate performance obligation until the access code was
provided to its customer.
Cutler Education Corporation developed a software product to help children under age 12 to learn
mathematics.
The software contains two separate parts: Basic Level (Level I) and Intermediate Level (Level II). The list
price of the software contains the access code only for Level I. Parents are eligible to purchase the access
code for a higher level only if their children pass an exam created by software. The accounting period
ends December 31.
Kerry purchases the software at a price of $50 for his child, Tom, on December 1, 2012. Suppose Tom
passed the Level I test on December 31, 2012, and Kerry immediately purchased the access code for
Level II part for Tom for an additional $10. Cutler licensed Level II to Kerry on the same day, December
31, but provides him the access code to Level II on January 10, 2013.
Required:
When would Cutler recognize revenue for the sale of Level I and II software?
Answer:
In this example, Kerry obtained the access code for Level I in the software on December 1, meaning that
Kerry has obtained the control of the right to use the software for Level I on that date. Therefore, on that
date Cutler should recognize $50 of revenue for Level I.
When Tom passed the Level I test on December 31, 2012, and purchased access to Level II, Cutler
licensed Level II to Kerry on the same day. However, Kerry received the access code for Level II on
January 10, 2013, so control over Level II in the software was not transferred to Kerry until January 10.
Therefore, Cutler should recognize $10 of revenue for Level II on January 10, 2013, rather than
December 31, 2012, because it did not satisfy a separate performance obligation until the access code was
provided to its customer.
