Question

Your company sells a product bundle that includes software and a 3 year service contract for $100,000, The company installed the software on July 1, 2020, and the client paid $50,000 cash. The balance is due on December 31, 2020. What if:

(a) the performance obligations are interdependent and cannot be separated out or sold separately.

(b) the performance obligations are not interdependent ( The service contract is sold separately for $25,000 and the software for $100,000.)

Answer 1

	Given that the company sells a product bundle that includes software and a 3 year service
	Contract for $100000 on July 1,2020 and receives $50000 in cash.
a)	If the performance obligations are interdependent and cannot be seperated out or sold
	seperately
	As the performance obligation is throughout 3 years and not at a point of time, the revenue
	shall be recognised over a period of time. Ie , through out the 3 years of time and not at a point
	of time.
	We know that,
	An entity recognises revenue over time if one of the following criteria is met:
1)	the customer simultaneously receives and consumes all of the benefits provided by the entity as the entity performs;
2)	the entity’s performance creates or enhances an asset that the customer controls as the asset is created;
3)	or the entity’s performance does not create an asset with an alternative use to the entity and the entity
	has an enforceable right to payment for performance completed to date.
	As the first condition is satisified the revenue shall be recognised over a period of time.
	The cash received shall be recorded as unearned revenue initially and shown as liability
	in books of accounts and reversed upon performance obligation getting satisfied.
b)	If the performance obligations are not interdependent
	The revenue upon sale of software shall be recognised on sale of software and
	revenue related to service contract over a period of time.
	If the total consideration is $100000, then
	Revenue to be recognised on sale of software	=	100000*100000/125000	=80000
	Revenue to be recognised on service contract	=		20000
	The receipt of cash shall also be treated in the above proportion.