Question

IBM sold a mainframe computer to its customer for 60 monthly payments of $92,082.61, which totals $5,524,956.60. IBM also agreed to provide installation and training for the customer for no additional charges. According to the agreement the customer is not required to use IBM for installation and training. IBM estimated that the standalone installation and training sales prices are $50,000 and $68,000, respectively. IBM used a 4% annual interest rate in determining the 60 monthly payments. The customer decided to have IBM install and train its employees and IBM delivered the computer on July 1 and completed installation on October 31. Training will take place over the next 12 months. The date of delivery starts the customer's payment obligation to IBM and IBM's year end is December 31.

Required:
a. What date may IBM recognize revenue from this transaction?
b. What is the total revenue amount and the related revenue component amounts IBM may recognize on the date specified in answer A?
c. How much interest income (revenue) will IBM recognize in its December 31 regular income statement from this transaction?

Answer 1

Answer number 1:

The contractor is required to provide the following products and services to the client according to the deal:

1. The mainframe computer cost will be $5,524,956.6

2. Installation charges will be provided by supplier at no cost.

3. Training will be provided by company for free of cost.

Earnings can be acknowledged on the statement of financial position when they are generated and received, according to the accrual basis of accounting.

Receiving the actual money is not required. The term "realizable" indicates that the customer has got the products or services, but that reimbursement is expected afterwards.

The firm's income is based on the items or services that have been supplied.

Because the mainframe computer system product was delivered on July 1, the vendor can record revenue for the device on July 1. So,  There really is no profit based on accounts of products such as implementation and training because they are to be given for free.

Answer number 2:

According to the given agreement, the buyer must pay a balance of $5,524,956.60 during 60 months, considering a 4% per year rate.

Computation:

Valuation

[Year 5 = Year 4 / (1+R)]

So,

Year 5  = $55,24,956.6

Year 4  = $53,12,458.27

Year 3  = $51,08,132.95

Year 2  = $49,11,666.3

Year 1   = $47,22,756.06

Total = $45,41,111.59

So,

Current value of the given agreement = $45,41,111.59

The vendor is entitled to $4,541,111.59 in revenue.

Answer number 3:

Interest income or revenue will IBM recognize in its December 31 regular income = The mainframe computer cost  - Current value of the given agreement

⇒ Interest income or revenue will IBM recognize = $55,24,956.6 - $45,41,111.59

⇒ Interest income or revenue will IBM  = 9,83,845.01

⇒ Monthly income = [9,83,845.01 / 60]

Monthly income = $16.397.42

Interest income or revenue will IBM recognize in its December 31 regular income = Monthly income x 6

⇒ Interest income or revenue will IBM recognize in its December 31 regular income = $16.397.42 x 6

Interest income or revenue will IBM recognize in its December 31 regular income = $98,384.50

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