Question

Ace Company manufactures equipment. Ace’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $130,000 to $1,100,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. Ace has the following relationship with Rose Inc. • Rose can purchase equipment from Ace for a price of $500,000 and contracts with Ace to install the equipment. Using market data, Rose determines installation service is estimated to have a fair value of $50,000. The cost of the equipment is $200,000. • Rose is obligated to pay Ace the $500,000 upon delivery and installation of the equipment. Ace delivers the equipment on August 1, 2020, and completes the installation of the equipment on October 1, 2020. The equipment has a useful life of 7 years. Assume the equipment and the installations are two distinct performance obligations that should be accounted for separately.

a) How should the transaction price of $500,000 be allocated among the service obligations?

b) Prepare the journal entries for Ace for this revenue arrangement for 2020, assuming Ace receives payment when installation is completed.

Answer 1

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