Question:
On January 1, Seneca Asset Management enters into a contract with a client to provide fund management
services for one year. The client is required to pay a fixed amount of $100,000 at the end of each quarter,
plus 10 percent of the increase in the fund’s value relative to an observable index at the end of the year.
Assume the fund increased by $800,000 over the course of the year.
Required:
1. Prepare the journal entry to record the first fixed payment.
2. Prepare the journal entry to record any additional revenue beyond the $100,000 fixed payment at the
end of the fourth quarter
Answer:
The transaction price should be limited to the fixed amount of consideration until the end of the year
because the asset management company cannot predict the amount of value that the fund will provide by
year-end. Even if Seneca could predict that amount with some accuracy, it would not be able to recognize
revenue associated with the bonus because that amount would not be reasonably assured until after year-
end.
1. Record the first quarterly payment.
Cash or accounts receivable 100,000
Revenue 100,000
2. Record the amount of additional revenue at the end of year.
Cash or accounts receivable ($800,000 x 10%) 80,000
On January 1, Seneca Asset Management enters into a contract with a client to provide fund management
services for one year. The client is required to pay a fixed amount of $100,000 at the end of each quarter,
plus 10 percent of the increase in the fund’s value relative to an observable index at the end of the year.
Assume the fund increased by $800,000 over the course of the year.
Required:
1. Prepare the journal entry to record the first fixed payment.
2. Prepare the journal entry to record any additional revenue beyond the $100,000 fixed payment at the
end of the fourth quarter
Answer:
The transaction price should be limited to the fixed amount of consideration until the end of the year
because the asset management company cannot predict the amount of value that the fund will provide by
year-end. Even if Seneca could predict that amount with some accuracy, it would not be able to recognize
revenue associated with the bonus because that amount would not be reasonably assured until after year-
end.
1. Record the first quarterly payment.
Cash or accounts receivable 100,000
Revenue 100,000
2. Record the amount of additional revenue at the end of year.
Cash or accounts receivable ($800,000 x 10%) 80,000
