Splish Company manufactures equipment. Splish's products range from simple automated machinery to...

Question:

Splish Company manufactures equipment. Splish'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.

Splish has the following arrangement with Winkerbean Inc.:

a. Winkerbean purchases equipment from Splish for a price of $940,000 and contracts with Splish to install the equipment. Splish charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Splish determines installation service is estimated to have a standalone selling price of $55,000. The cost of the equipment is $630,000.

b. Winkerbean is obligated to pay Splish the $940,000 upon the delivery and installation of the equipment.

Splish 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 that should be accounted for separately.

Required:

1. How should the transaction price of $940,000 be allocated among the service obligations?

2. Prepare the journal entries for Splish for this revenue arrangement on June 1, 2017 and September 1, 2017, assuming Splish receives payment when installation is repeated.

Revenue Recognition:

Revenue Recognition between two separate performance obligation must be based on their stand alone selling prices. The price/cost is allocated by the different percentages based of the stand alone price over the total. The computed allocation will be the sold/cost of the purchased performance obligation which will be recognized as revenue/expense

Answer and Explanation: 1

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1.How should the transaction price of $940,000 be allocated among the service obligations?


RefStand Alone PricePercentageAllocation
Installation55...

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What is Revenue Recognition? - Principles, Process & Examples

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Chapter 7 / Lesson 2
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Revenue recognition states that revenue is recorded when it is realized, or realizable and earned, as opposed to received. Learn about the principles and process of revenue recognition with examples of recognition criteria before exploring some exceptions to the rule.


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