Question
In: Accounting
Metlock Company manufactures equipment. Metlock’s products range from simple automated machinery to complex systems containing numerous...
Metlock Company manufactures equipment. Metlock’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. Metlock has the following arrangement with Winkerbean Inc.
| ● | Winkerbean purchases equipment from Metlock for a price of $930,000 and contracts with Metlock to install the equipment. Metlock charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Metlock determines installation service is estimated to have a standalone selling price of $45,000. The cost of the equipment is $590,000. | |
| ● | Winkerbean is obligated to pay Metlock the $930,000 upon the delivery and installation of the equipment. |
Metlock delivers the equipment on June 1, 2020, and completes the
installation of the equipment on September 30, 2020. The equipment
has a useful life of 10 years. Assume that the equipment and the
installation are two distinct performance obligations which should
be accounted for separately.
(a)
How should the transaction price of $930,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)
| Equipment | $ | |
| Installation | $ |
Solutions
Expert Solution
| Answer: |
|
Total Cost = Purchase Price + Standalone selling price = $ 930,000 + $ 45,000 = $ 975,000 |
| (a) |
|
Allocated transaction price for
Equipment = Purhase Price / Total Cost x transaction Price = $ 930,000 / $ 975,000 x $ 930,000 = $ 887,077 |
| Equipment = $ 887,077 |
|
Allocated transaction price for
Installation = Standalone selling price / Total Cost x transaction Price = $ 45,000 / $ 975,000 x $ 930,000 = $ 42,923 |
| Installation = $ 42,923 |
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