Question

Easywrite Software Company shipped software to a customer on July 1, 2013. The arrangement with the customer also requires the company to provide technical support over the next 12 months and to ship an expected software upgrade on January 1, 2014. Assuming that Easywrite sold each of the components separately for the amounts listed, the total contract price is $258,000, and Easywrite estimates that the individual fair values of the components of the arrangement if sold separately would be

: Software $ 210,000

Technical support 20,000

Upgrade 20,000

Required: 1. Determine the timing and amount of revenue recognition for the $258,000.

2. Assume that the $258,000 contract price was paid on July 1, 2013.

Prepare a journal entry to record the cash receipt. Do not worry about the cost of the items sold. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Answer 1

1). Timing and amount of revenue recognition for $258,000.

	Timing	Amount
Software	Date of shipment, July 1, 2013	$216,720
Technical Support	Evenly over 12 months of the agreement	$20,640
Upgrade	Date of shipment, January 1, 2014	$20,640

Total of Individual fair values = $210,000 + $20,000 + $20,000 = $250,000
Amount to be recognised:
Software = $210,000 * $258,000 / $250,000 = $216,720
Technical support = $20,000 * $258,000 / $250,000 = $20,640
Upgrade = $20,000 * $258,000 / $250,000 = $20,640

2). Journal entry to record the cash receipt on July 1, 2013:

Account Titles	Debit	Credit
Cash	$258,000
Revenue		$216,720
Unearned revenue		$41,280