4. Financial Software Inc. (FSI) provides ERP software to large corporations. Big Corporation signs a contract with FSI on January 1, 2018. FSI will provide the ERP, including installation and testing, consulting services to integrate the software with all of Big Corp’s other systems and 3 years of support services. Another firm could provide the support services, but FSI requires that they perform the installation and testing. The total price of the contract is $2,400,000. FSI would charge $1,800,000 for the software (including installation and testing) and the estimated fair value of the support services is $600,000. FSI completes the installation and testing during 2018. The support services will be provided in 2018, 2019 and 2020.
Determine how to recognize revenue in 2018, 2019 and 2020. Please explain your recommendation.
| Case 1 | |||
| If FSI Does not Gives support services | |||
| Revenue to be booked:- | Installation and testing | Support Services | Total |
| 2018 | $1,800,000 | 0 | $1,800,000 |
| 2019 | - | 0 | $0 |
| 2020 | - | 0 | $0 |
| No revenue to be booked in 2019 and 2020 because FSI is not giving support services, | |||
| and has given complete installation and testing services | |||
| Case 2 | |||
| If FSI Gives support services | |||
| Revenue to be booked:- | Installation and testing | Support Services | Total |
| 2018 | $1,800,000 | 200000 | $2,000,000 |
| 2019 | - | 200000 | $200,000 |
| 2020 | - | 200000 | $200,000 |
| Installation and testing services will be recognized as whole and support services are deferred over 3 years, | |||
| so $200000 is equally spread in all the 3 years of services |
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