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Chapter 18: Q4BE. (page 1032)

Destin Company signs a contract to manufacture a new 3D printer for \(80,000. The contract includes installation which costs \)4,000 and a maintenance agreement over the life of the printer at a cost of $10,000. The printer cannot be operated without the installation. Destin Company as well as other companies could provide the installation and maintenance agreement. What are Destin Company鈥檚 performance obligations in this contract?

Short Answer

Expert verified

This contract has three performance obligations such as3-D printer manufacturing, installation services, and maintenance services.

Step by step solution

01

Performance Obligations

The obligations stipulated by both parties' mutual contract to do something under legal guidance are known as performance obligations. This requires the parties to fulfill their duties within a given period.

02

Performance obligations under this contract

Under this contract, there are three performance obligations

  1. They must manufacture 3-D printers for $80,000.
  2. They have another obligation to install printers.
  3. The third obligation for Destin company is a maintenance agreement.

Both parties must fulfill their duties within the stipulated time frame. If one party does not perform their duty, the other can file a case in court.

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Most popular questions from this chapter

Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers can purchase any combination of equipment, installation services, and training as part of Fuhremann鈥檚 security services. Thus, each of these performance obligations is separate from individual standalone selling prices. Laplante Inc. purchased cameras, installation, and training at a total price of \(80,000. Estimated standalone selling prices of the equipment, installation, and training are \)90,000, \(7,000, and \)3,000, respectively. How should the transaction price be allocated to the equipment, installation, and training?

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(a) Prepare any journal entries to record the revenue arrangement for Tablet Bundle A on January 2, 2017, and December 31, 2017.

Question: P18-3 (LO2,3,4) (Allocate Transaction Price, Discounts, Time Value) Grill Master Company sells total outdoor grilling solutions, providing gas and charcoal grills, accessories, and installation services for custom patio grilling stations.

Instructions

Respond to the requirements related to the following independent revenue arrangements for Grill Master products and services.

On October 1, 2017, Grill Master sold one of its super deluxe combination gas/charcoal grills to a local builder. The builder plans to install it in one of its 鈥淧arade of Homes鈥� houses. Grill Master accepted a 3-year, zero-interest-bearing note with face amount of \(5,324. The grill has an inventory cost of \)2,700. An interest rate of 10% is an appropriate market rate of interest for this customer. Prepare the journal entries on October 1, 2017, and December 31, 2017.

Question: CA18-8 ETHICS (Revenue Recognition鈥擬embership Fees) Midwest Health Club (MHC) offers 1-year memberships. Membership fees are due in full at the beginning of the individual membership period. As an incentive to new customers, MHC advertised that any customers not satisfied for any reason could receive a refund of the remaining portion of unused membership fees. As a result of this policy, Richard Nies, corporate controller, recognized revenue ratably over the life of the membership. MHC is in the process of preparing its year-end financial statements. Rachel Avery, MHC鈥檚 treasurer, is concerned about the company鈥檚 lacklustre performance this year. She reviews the financial statements Nies prepared and tells Nies to recognize membership revenue when the fees are received.

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.
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