Question

Larkspur Company manufactures equipment. Larkspur’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. Larkspur has the following arrangement with Winkerbean Inc.

? Winkerbean purchases equipment from Larkspur for a price of $960,000 and contracts with Larkspur to install the equipment. Larkspur charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Larkspur determines installation service is estimated to have a standalone selling price of $50,000. The cost of the equipment is $560,000.

? Winkerbean is obligated to pay Larkspur the $960,000 upon the delivery and installation of the equipment.

Larkspur delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. 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 $960,000 be allocated among the service obligations?

Answer 1

The total revenue is allocated to the two performance obligation based on its fair value
	Equipment	$560,000
	Installation	$50,000
	Total fair value	$610,000
	Total revenue allocated
ans 1	Equipment 960000/610000*560000	$881,311
	Installation 960000/610000*50000	$78,689

ans 2: Journal Entry
Date	Accounts Title	Dr	Cr
01-Jun	Accounts Receivable	$881,311
	Sales Revenue		$881,311
01-Jun	Cost of Good sold	$560,000
	Inventory		$560,000
30-Sep	Accounts Receivable	$78,689
	Service Revenue		$78,689
30-Sep	Cash	$960,000
	Accounts Receivable		$960,000