Question

On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $80,400. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $52,000 for the scales, $10,000 for the software, and $38,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date.

Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2021 for this contract?

Multiple Choice

• $33,500

• $49,848

• $80,400

• $0

Answer 1

If the contract has only one performance obligation, that revenue will be recognized over time as the Ortiz provides the combination of scales, software and calibration service. No revenue can be recognized upon delivery of the computer or software. Since the contract has a one-year duration and commenced on August 1, 2021, revenue for five months (from 1st August to 31st December) has been earned in 2021, equal to $33,500 (computed as $80,400 ×5/12).

Therefore,

Revenue recognized in 2021 for this contract by Ortiz:

= $80,400 X (5 months / 12 months)

= $33,500.