Question

In: Accounting

Clarks & Co. signed a contract on January 15, 2020 to provide Daisies Cake Factory with...

Clarks & Co. signed a contract on January 15, 2020 to provide Daisies Cake Factory with an
ingredient-weighing system for a price of $150,000. The system included finely tuned scales that
fit into Daisies automated line, Clarks proprietary software modified to allow the weighing
system to function in Dasies automated system, and a two-year contract to calibrate the
equipment and software on an as-needed basis. If Clark was to provide these goods or services
separately, it would charge $120,000 for the scales, $20,000 for the software, and $30,000 for the
calibration contract. Clark Company delivered and installed the equipment and software on
February 1, 2020, and the calibration service commenced on that date.


A. Assume that the scales, software and calibration service are all separate performance
obligations.


1. How much revenue will Clark recognize in 2020 for this contract?
2. Record in General Journal form the above transactions and required adjusting
entry at December 31, 2020.


B. Assume that the scales, software and calibration service are viewed as one performance
obligation. How much revenue will Clark recognize in 2020 for this contract?

Solutions

Expert Solution

1. At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either :

  • (a) a good or service (or a bundle of goods or services) that is distinct; or
  • (b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

2. An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.

3. To allocate the transaction price to each performance obligation on a relative stand-alone selling price basis, an entity shall determine the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling prices.

4. In the give scenario, the Clarks & Co. signed a contract on January 15, 2020 to provide Daisies Cake Factory with an ingredient-weighing system for a price of $150,000. The system included finely tuned scales that fit into Daisies automated line, Clarks proprietary software modified to allow the weighing system to function in Dasies automated system, and a two-year contract to calibrate the equipment and software on an as-needed basis.

5. If Clark was to provide these goods or services separately, it would charge $120,000 for the scales, $20,000 for the software, and $30,000 for the calibration contract (i.e., $15,000 per year).

6. Clark Company delivered and installed the equipment and software on February 1, 2020, and the calibration service commenced on that date.

A. scales, software and calibration service are all separate performance obligations.

Since all the performance obligations are distinct, the Clark shall recognise the revenue upon fulfilment of perfomance obligation. The performance obligation in relation to Scales and Software is completed as and when these are delivered and installed (i.e, completed on Feb 1, 2020). The calibration contract falls under performance obligations entity satisfies over time. In this case, the Clark shall recognise the revenue over period of time.

Therefore, the clark shall recognise the revenue for the year ending Dec 31, 2020 is as follows :

a. Revenue from Scales - $ 150,000 * ($120,000/$170,000) = $ 105, 882.35

b. Revenue from Software - $ 150,000 * ($20,000/$170,000) = $ 17,647.06

c. Revenue from calibration service - $150,000 * ($30,000/$170,000) = 26,470.59 for two years. However, in the current year the total period lapsed was 11 months out of 2 years. Therefore, the revenue to be recognised for the year ending Dec 31, 2020 is $26,470.59*11/24 = $12,132.35

Journal

Particulars Debit Particulars Credit
Revenue from Scales 105,882.35
Revenue from Software    17,647.06
Reveue from calibration service    12,132.35
Total Revenue 135,661.76

B. Scales, software and calibration service are viewed as one performance obligation.

Revenue shall be recognize in 2020 for this contract is : Revenue from Contract - $ 150,000

However, clark need to create provision for future performance obligation i.e, calibaration service for the unexpired 13 months. Therefore, expense need to be booked = $ 30,000 * 13/24 = $ 16,250


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