Question

	Woody Co. is an experienced pellet stove dealer that also offers a number
	of services for the stoves that it sells.
	Assume that Woody's sells pellet stoves on a standalone basis and that it also sells
	installation and maintenance service for stoves. However, Woody's does not
	offer installation or maintenance services to customers who buy stoves from other
	vendors. Pricing of the pellet stoves is as follows:
	Stove only			1,200
	Stove with installation service			1,275
	Stove with maintenance service			1,465
	Stove with installation and maintenance services			1,500
	In each instance in which maintenance services are provided, the maintenance
	service is separately priced within the arrangement at $265.   Additionally, the
	incremental amount charged by Woody's for installation approximates the
	amount charged by independent third parties.
a	The customer purchases a pellet stove with both installation and maintenance
	services for $1,500.   Based on its experience,Woody's believes that the
	installation will be performed satisfatorily. Assume that the maintenance services
	are priced separately, (the three components are distinct).
	Identify the separate performance obligations related to this situation.
b	Indicate the amount of revenue that should be allocated to each performance
	obligation.

Answer 1

Woody co. agrees with a customer to install the stove with both installation and maintenance services for $1500. The stove is working without any modification.

As per above, there are three promises in the contract, i.e.

(1) the stove

(2) the installation services and

(3) the maintenance services.

The entity must evaluate whether every promised good or service is separate. Woody co. determines that the customer can profit from the stove on its own by using it or reselling it.

The customer can also profit from the maintenance services bundled along with other resources that the customer will have already obtained from the woody co. (i.e. the stove) – the same logic would apply to the installation services.

In evaluating whether the stove and the installation services are separately recognizable in the situation of the contract, woody co. contemplates the following:

• Woody co. is not providing an important integration service. Woody co. would be able to accomplish its promise to handover the stove distinctly from its promise to later install it. Woody co. has not promised to combine the stove and the installation services in a way that would convert them into a combined output.

• The installation services will not significantly modify the stove as the customer can use the stove as is once transported to the customer.

• The stove and installation services are not highly interrelated because the stove and installation services do not significantly affect each other. Woody co. would be able to achieve its promise to handover the stove independently of its promise to do the installation.

On this basis, there are three performance obligations in the contract:

(1) the stove

(2) the installation services and

(3) the maintenance services