Question

Culver Company manufactures equipment. Culver’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. Culver has the following arrangement with Winkerbean Inc.

●		Winkerbean purchases equipment from Culver for a price of $1,040,000 and contracts with Culver to install the equipment. Culver charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Culver determines installation service is estimated to have a standalone selling price of $51,000. The cost of the equipment is $620,000.
●		Winkerbean is obligated to pay Culver the $1,040,000 upon the delivery and installation of the equipment.

Culver delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. 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.

Assuming Culver does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $35,700; Culver prices these services with a 20% margin relative to cost.

How should the transaction price of $1,040,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)

Equipment $__________

Installation $___________

Prepare the journal entries for Culver for this revenue arrangement on June 1, 2017, assuming Culver receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Accounts Titles and Explanation	Debit	Credit
(to record sales)
(to record cost of goods sold)
(to record service revenue)
(to record payment received)

Answer 1

Selling price of Installation service		51000
Selling price of equipment		1040000
Combined value		1091000
Price allocated to Installation service (1040000*51000/1091000)		48616
Price allocated to equipment (1040000*1040000/1091000)		991384

Accounts Titles and Explanation	Debit	Credit
Account receivable	991,384
Sales revenue		991,384
(To record sales)
Cost of goods sold	620,000
Inventory		620,000
(To record cost of goods sold)
Account receivable	48,616
Service revenue		48,616
(To record service revenue)
Cash	1,040,000
Account receivable		1,040,000
(To record payment received)

Assuming Culver does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $35,700; Culver prices these services with a 20% margin relative to cost. How should the transaction price of $1,040,000 be allocated among the service obligations?
Selling price of Installation service (35700+(35700*20%))		42840
Selling price of equipment		1040000
Combined value		1082840
Price allocated to Installation service (1040000*42840/1082840)		41145
Price allocated to equipment (1040000*1040000/1082840)		998855