Question

Sweet Company manufactures equipment. Sweet’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Sweet has the following arrangement with Winkerbean Inc.

● Winkerbean purchases equipment from Sweet for a price of $930,000 and contracts with Sweet to install the equipment. Sweet charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Sweet determines installation service is estimated to have a standalone selling price of $46,000. The cost of the equipment is $560,000.
● Winkerbean is obligated to pay Sweet the $930,000 upon the delivery and installation of the equipment.

Sweet delivers the equipment on June 1, 2020, and completes the installation of the equipment on September 30, 2020. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.


How should the transaction price of $930,000 be allocated among the service obligations?
Equipment $
Installation $



Prepare the journal entries for Sweet for this revenue arrangement on June 1, 2020 and September 30, 2020, assuming Sweet receives payment when installation is completed.

Answer 1

Answer:

Equipment:

= Fair value of Equipment / Total fair value * Transaction price

= Fair value of Equipment / (Equipment+Installation) * Transaction price

= $930,000 / ($930,000+$46,000) * $930,000

= $886,168.03

Installation:

= Fair value of Installation / Total fair value * Transaction price

= Fair value of Installation / (Equipment+Installation) * Transaction price

= $46,000 / ($930,000+$46,000) * $930,000

= $43,831.97

Thus, the  transaction price of $930,000 allocated to Equipment is $886,168.03 and $43,831.97 to Installation

Date    Account Titles and Explanation        Debit           Credit

June 1  Account receivable                         $930,000

                 Sales revenue                                                 $886,168.03

                 Unearned service revenue                            $43,831.97  

             (To record the sales of equipment including installation to W)

June 1  Cost of goods sold                           $560,000

                 Inventory                                                          $560,000

             (To record the cost of equipment sold)

Sep 30  Unearned service revenue             $43,831.97

                 Service revenue                                               $43,831.97

              (To record the revenue on installation of equipment)

Sep 30  Cash                                                 $930,000

                 Account receivable                                           $930,000

              (To record the receipt of cash flow from W)