Question

On July 15, 2018, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $79,200. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods or services separately, it would charge $51,000 for the scales, $10,000 for the software, and $39,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date.

Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2018 for this contract?

Multiple Choice

$79,200

$48,312

$61,182

$0

Answer 1

The question does not have any clarity as to which GAAP to apply. i.e., Whether US GAAP or IFRS. I have written the solution both under IFRS and US GAAP. There is a distinct difference between the both, so the solution is not mentioned differently. Solution is mentioned below:

Under US-GAAP and IFRS:

Revenue from goods and Services:

The unit of account for revenue recognition under the new standard is a performance obligation (a good or service). A contract may contain one or more performance obligations.
Performance obligations will be accounted for separately if they are distinct. A good or service is distinct if the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer, and the good or service is distinct in the context of the contract. Otherwise performance obligations will be combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct
The transaction price is allocated to all the separate performance obligations in an arrangement. It reflects the amount of consideration to which an entity expects to be entitled in exchange for transferring goods or services, which may include an estimate of variable consideration to the extent that it is probable of not being subject to significant reversals in the future based on the entity’s experience with similar arrangements. The transaction price will also reflect the impact of the time value of money if there is a significant financing component present in an arrangement. The transaction price excludes amounts collected on behalf of third parties, such as some sales taxes.

In the above mentioned question there is a clear assumption that each deliverable is a performance obligation.Ortiz delivered and installed the equipment and software on August 1, 2018, and the calibration service commenced on that date.

Sale of scales	51,000	51%
Sale of Software	10,000	10%
Calibration Contract	39,000	39%
	1,00,000	100%

% of revenue Allocation:

Sale of scales	51%	40,392
Sale of Software	10%	7,920
Calibration Contract	39%	30,888
	100%	79,200

As the calibration contract is a period contract. Revenue is to be allocated over a period of time. Hence the final revenue to be recognized=

Sale of scales	40,392		40,392
Sale of Software	7,920		7,920
Calibration Contract	30,888	For 5 Months	12,870
	79,200		61,182

Hence final revenue = 61,182