Question

Moon Company licenses accounting software and provides training and support, both separately and as bundled service packages. It charges $150,000 for licensing and $30,000 per year for training and support. However, Moon offers discounts ranging from 10% to 20% for customers who contract for both. On July 1, 2018, Moon licenses the software to Sun Company under an agreement that includes training and support as well as updates to the software for the duration of the three-year contract. The total contract price is $200,000, and Sun pays half that amount at signing. The contract stipulates that the remaining half cannot be billed until Sun has had six months to assess both the software’s continued suitability for the company’s needs and Sun’s satisfaction with the quality of Moon’s training and support services.

Required— prepare the journal entry(s), if any, that Moon should record under FASB ASC 606 on July 1, 2018, briefly explaining your rationale:

The software is functional at the time that Moon transfers the license to Sun and is not expected to change substantially throughout the license period. Updates to the software ordinarily relate to security and refinements. While they improve the software, they do not alter its basic functionality. These updates are typically made every 18 months or so, and the next one is scheduled for June of 2019. Although updates are not sold separately from the software, Moon believes that their value is approximately $10,000. Sun is a repeat customer and so is experienced with the software. Therefore, Moon expects Sun’s usage of the training and support services will remain fairly steady throughout the three-year contract period.

Answer 1

ANSWER :

1/7/18

1. ACCOUNTS RECEIVABLE ( SUN Co) DR $2,00,000

DISCOUNT ALLOWED DR $50,000

SOFTWARE LICENCE A/C _ Deferred Revenue    CR $ 1,50,000

TRAINING AND SUPPORT A/C - Deferred Revenue CR $ 90,000

SOFTWARE UPDATE A/C - Deferred Revenue CR $ 10,000

( Being the entry passed according the FASB ASC606 for revenue recognition )

2. BANK A/C DR $ 1,00,000

TO ACCOUNTS RECEIVABLE (SUN Co) CR $1,00,000

( Being the amount received from Sun Co accounted )

3. Soft Ware Licence A/c ( Deferred Revenue ) A/c DR $ 30,000

    Training & Support ( Deferred Revenue ) A/c DR $ 18,000

Software update ( Deferred Revenue ) A/c DR $ 2,000

To Dicount Allowed A/c Cr $ 50,000

( Being the discount allowed adjusted against the actual price recivable )

REASONS

AS PER THE FASB ASC 606 ON IDENTIFYING THE CUSTOMER, PERFORMANCE OBLIGATION, TRANSACTION PRICE , THE TRANSACTION PRICE ARE TO BE ALLOCATED TO THE PERFORMANCE OBLIGATIONS AND THE REVENUESIS TO BE RECOGNISED ON THE PERFORMANCE OF THE OBLIGATION )