Question

Rover Company, a public company, manufactures equipment and also provides installation services. The installation process does not involve changes to the features of the equipment to perform specifications. Rover has the following relationship with Canine Inc.: • Canine decides to purchase equipment from Rover and contracts with Rover to install the equipment for a total price of $420,000. If Canine only purchased the equipment from Rover, the price would be $400,000 • Canine contacts another company and determines installation service would cost $40,000 if another company did the installation. • Rover’s cost of the equipment is $280,000. • Canine is obligated to pay Rover the $410,000 upon delivery of the equipment. Rover delivers the equipment on June 1, Year 7, and completes the installation of the equipment on August 1, Year 7. The equipment has a useful life of 7 years. Required: i) Identify the separate performance obligations and explain why (1 mark). ii) Allocate the price to the performance obligations . iii) Prepare the journal entries on May 1 and July 1, Ye

Answer 1

Answer 1

There are two performance obligations in this contract. 1) Delivery of equipment and 2) Provide the installation service. Cash received is not considered as performance obligation.

Answer 2

			Amount
Standalone price of equipment			$      400,000
Standalone price of installation service			$         40,000
Total price			$      440,000
Total combined price			$      420,000
Allocated value to equipment (420000*(400000/440000))			$      381,818
Allocated value to installation service (420000*(40000/440000))			$         38,182
Total combined price			$      420,000

Answer 3

Unearned installation service revenue is also known as deferred revenue.

Date	General Journal	Debit	Credit
June 1, Year 7	Cash	$       410,000
	Accounts receivable (420000-410000 received)	$          10,000
	Sales revenue		$      381,818
	Unearned installation service revenue		$         38,182
	To record delivery of equipment.
	Cost of goods sold	$       280,000
	Inventory		$      280,000
	To record cost of goods sold.
August 1, Year 7	Unearned installation service revenue	$          38,182
	Service revenue		$         38,182
	To record service revenue.