On 1 January 2016, Producer enters into a contract to deliver a product to Customer on 31 March 2016. The contract is non-cancellable and requires Customer to make an advance payment of €5,000 on 1 February 2016. Customer does not pay the consideration until 1 March. How should Producer reflect the transaction in the statement of financial position?
A) 1 February 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
B) 1 February 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

1 March 2016
Dr Cash $\quad\quad€ 5,000$
$ \mathrm{Cr} $ Trade Receivables$\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
C) 1 January 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

1 February 2016
Dr Cash $\quad\quad€ 5,000$
$ \mathrm{Cr} $ Trade Receivables$\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
D) None of the above

Question

On 1 January 2016, Producer enters into a contract to deliver a product to Customer on 31 March 2016. The contract is non-cancellable and requires Customer to make an advance payment of €5,000 on 1 February 2016. Customer does not pay the consideration until 1 March. How should Producer reflect the transaction in the statement of financial position?
A) 1 February 2016 
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

31 March 2016 
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
B) 1 February 2016 
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

1 March 2016 
Dr Cash $\quad\quad€ 5,000$
$ \mathrm{Cr} $ Trade Receivables$\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
C) 1 January 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability$\quad\quad€ 5,000$

1 February 2016 
Dr Cash $\quad\quad€ 5,000$
$ \mathrm{Cr} $ Trade Receivables$\quad\quad€ 5,000$

31 March 2016 
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue$\quad\quad€ 5,000$
D) None of the above

Quizplus · Accepted Answer

Option B is correct because it accurately reflects the sequence of transactions according to accounting principles. On 1 February 2016, the producer recognizes a contract liability and a corresponding trade receivable because the customer is obliged to make an advance payment. When the payment is actually made on 1 March 2016, the producer records the receipt of cash and eliminates the trade receivable. Finally, upon delivery of the product on 31 March 2016, the producer recognizes revenue and eliminates the contract liability.

On 1 January 2016, Producer Enters into a Contract to Deliver