Allocating the Transaction Price. HeavyEQ produces large conveyor belt systems for heavy manufacturing. HeavyEQ signs a...

Allocating the Transaction Price. HeavyEQ produces large conveyor belt systems for heavy manufacturing. HeavyEQ signs a $2 million ﬁxed-price contract under which it makes three promises:

Install a conveyor belt system: fair value $1.6 million
Service the system over a ﬁve-year period: fair value $0.6 million
Provide a warranty assuring that the conveyer belt meets the contract speciﬁcation at the time of sale: fair value $0.2 millioN

REQUIRED

a. Allocate the transaction price to the performance obligations.

b. Reallocate the transaction price under the notion that HeavyEQ has no reasonable basis for determining the fair value of the servicing because the conveyor system is of such a unique nature that the servicing activities are highly variable and uncertain

Expert Solution

Colby Messinger answered 2 years ago

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $216,000,...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $216,000, has a four-year life, and requires $69,000 in pretax annual operating costs. System B costs $306,000, has a six-year life, and requires $63,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 21...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $232,000,...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $232,000, has a four-year life, and requires $73,000 in pretax annual operating costs. System B costs $330,000, has a six-year life, and requires $67,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $260,000,...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $260,000, has a four-year life, and requires $80,000 in pretax annual operating costs. System B costs $366,000, has a six-year life, and requires $74,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $252,000,...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $252,000, has a four-year life, and requires $78,000 in pretax annual operating costs. System B costs $354,000, has a six-year life, and requires $72,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 23...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $204,000,...

Peyton Manufacturing is trying to decide between two different conveyor belt systems. System A costs $204,000, has a four-year life, and requires $66,000 in pretax annual operating costs. System B costs $288,000, has a six-year life, and requires $60,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $272,000,...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $272,000, has a four-year life, and requires $83,000 in pretax annual operating costs. System B costs $384,000, has a six-year life, and requires $77,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is 30...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $264,000,...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $264,000, has a four-year life, and requires $81,000 in pretax annual operating costs. System B costs $372,000, has a six-year life, and requires $75,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $212,000,...

Matta Manufacturing is trying to decide between two different conveyor belt systems. System A costs $212,000, has a four-year life, and requires $68,000 in pretax annual operating costs. System B costs $300,000, has a six-year life, and requires $62,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Suppose the company always needs a conveyor belt system; when one wears out, it must be replaced. Assume...

Matta manufacturing is trying to decide between two different conveyor belt systems. System A costs $264,000,...

Matta manufacturing is trying to decide between two different conveyor belt systems. System A costs $264,000, has a four year-life, and requires $81,000 in pretax annual operating costs. System B costs $372,000, has a six year life, and requires $75,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will not be replaced when it wears out. The tax rate is...

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. Systems...

Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. Systems A cost $24,000, has a four- year life and requires $750, 00 in pretax annual operating cost. Systems B cost $340,000 has a six-year life, and requires $69,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever project is chosen, it will not be replaced when it wears out....

Question