Gupta Industries received a $300,000 prepayment from Packard Associates for the sale of new equipment. Gupta will bill Packard an additional $100,000 upon delivery of the equipment. Upon receipt of the $300,000 prepayment, how much should Gupta recognize for a contract asset, a contract liability, and accounts receivable?
A) Contract asset: $0; contract liability: $300,000, accounts receivable, $0.
B) Contract asset: $300,000; contract liability: $0, accounts receivable, $0.
C) Contract asset: $0; contract liability: $300,000, accounts receivable, $100,000.
D) Contract asset: $300,000; contract liability: $0, accounts receivable, $100,000.

Question

Quizplus · Accepted Answer

The $300,000 is a prepayment and so is a contract liability. The $100,000 owed upon delivery is neither a contract asset nor an account receivable, because Gupta has not fulfilled its performance obligation and so has neither a conditional nor an unconditional right to receive payment.

Gupta Industries Received a $300,000 Prepayment from Packard Associates for the Sale