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

Part A -

Allocation made to both the Cost of Equipment and Installation are made according to their standard prices. Given the cost of equipment is 640,000 and Standard Installation costs are 53,000. Therefore allocation is as follows -

a. To Equipment = 970000*640000/693000 = 895,815

b. To Installation Service = 970000*53000/693000 = 74,185

Part B -

On June 2020, Sevice is performed by Indigo Co. As such, We should recognize the revenue in the books of accounts of the Indigo company. Following Journal entries are passed -

Dr. Winkerbean 970,000

Cr. Revenue from Opeartions 970,000

(Being Sevice Revenue, along with installation service, recognized and payment due from the Winkersbean)

Dr. Cost of Goods Sold 640,000

Cr. Inventory 640,000

(Being Cost of Goods Sold recognized)

Explanation - Since Indigo Co. deals with large complex machinery, they will have in their inventory these equipments. As per IFRS/ GAAP standards, Inventory is recognized at lower of cost or market, whichever is lower. So actual cost is recognized.

On September 2020, following entry is passed for payment received

Dr. Bank 970,000

Cr. Winkerbean 970,000

(Being payment received from Winkerbean )