Question

Indigo Company manufactures equipment. Indigo’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Indigo has the following arrangement with Winkerbean Inc.

●		Winkerbean purchases equipment from Indigo for a price of $970,000 and contracts with Indigo to install the equipment. Indigo charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Indigo determines installation service is estimated to have a standalone selling price of $53,000. The cost of the equipment is $640,000.
●		Winkerbean is obligated to pay Indigo the $970,000 upon the delivery and installation of the equipment.

Indigo delivers the equipment on June 1, 2020, and completes the installation of the equipment on September 30, 2020. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately.

How should the transaction price of $970,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)

Equipment		$
Installation		$

eTextbook and Media

List of Accounts

  

  

Prepare the journal entries for Indigo for this revenue arrangement on June 1, 2020 and September 30, 2020, assuming Indigo receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Jun. 1, 2020Sep. 30, 2020
	(To record sales)
	(To record cost of goods sold)
Jun. 1, 2020Sep. 30, 2020
	(To record service revenue)
	(To record payment received)

show work and explain

Answer 1

ANSWER:

(a)

The total revenue of $970,000 should be allocated to the two performance obligations based on their standalone selling prices. In this case, the standalone selling price of the equipment should be considered $970,000 and the standalone selling price of the installation fee is $53,000. The total standalone selling price to consider is $1,023,000 ($970,000 + $53,000). The allocation is as follows.

Equipment ($970,000 / $1,023,000) X $970,000 = $919746
Installation ($53,000 / $1,023,000) X $970,000 = $ 50,254

(b)

Indigo makes the following entries:

June 1, 2020
                           

Accounts Receivable                            970,000
Unearned Service
Revenue (Installation)                                   50,254
Sales Revenue (Equipment) —                              919,746

Cost of Goods Sold.......................      640,000
Inventory —                                              640,000

September 30, 2020
Unearned Service Revenue                   50,254
Service Revenue (Installation) —                         50,254             

Cash . 970,000
Accounts Receivable — .                                  970,000
The sale of the equipment should be recognized upon delivery, as the customer controls the asset and therefore Indigo's performance obligation is met. Service revenue for the installation is recognized on September 30, 2020 - the services have been provided and the performance obligation is satisfied.