Question

Day 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, Day offers discounts ranging from 10% to 20% for customers who contract for both. On July 1, 2018, Day licenses the software to Night 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 Night pays half that amount at signing. The contract stipulates that the remaining half cannot be billed until Night has had six months to assess both the software’s continued suitability for the company’s needs and Night’s satisfaction with the quality of Day’s training and support services.

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

The software is functional at the time that Day transfers the license to Night 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, Day believes that their value is approximately $10,000. Night is a repeat customer and so is experienced with the software. Therefore, Day expects Night’s usage of the training and support services will remain fairly steady throughout the three-year contract period.

Answer 1

Facts of the case: Day Company has given license plus training and support. as well as updates to the software for the three year duration. Contract price as per Day Company price Tag is 200000$ . Night Company initially pays off only, half i.e 100000$ as a valueof License and training support. As per the contract, Six month to be cruicial to determine the stability of the Software and quality of the training and support.

So, According to the contract and Standard , Day will book license revenue to the extent of 100000$ for first six month and at the end of the Six month on the customer feedback, another half will be charged to revenue.

SO, here no revenue is earmed for first half and second half is depend upon the future events taken care by the Day Co.

Night Company A/c Dr.   100000$

To Sale of License A/c 100000$

( Being Sale of License)

Secondly, another half is cannot be booke as revenue, as it satisfy the definitin of Contingent Asset. because Day Co. knows their service, and accordingly Night Co. will later on come with confirmation to continue with them only. Hence recording for the same will not be made in the books of records.

Determining the rationale of the Contract, that updates cannot be sold separately as training and support is also adjacent to the license, but they will record revnue for that part of training and support and same will be remain steady during the period, if revenue is depend upon the training and support in coming years, then Revenue need to be recorded once performance is complete and not on the basis of license is transferred. If license is not depend upon the Training and support then whole revenue is charged in books of account.