Question

1. Joe Windows manufactures and sells custom storm windows for three-season porches. Joe also provides installation service for the windows. The installation process does not involve changes in the windows, so this service can be performed by other vendors. Joe enters into the following non-cancellable contract on July 1, 2020, with a local homeowner. The customer purchases windows for a price of $2,400 and chooses Joe to do the installation. Joe charges the same price for the windows regardless of whether it does the installation or not. The price of the installation service is estimated to have a fair value of $600. The customer pays Joe $2,000 (which equals the fair value of the windows, which have a cost of $1,100) upon delivery and the remaining balance upon installation of the windows. The windows are delivered on September 1, 2020, Joe completes installation on October 15, 2020, and the customer pays the balance due. Using the five-step process for revenue recognition, determine when and how much revenue would be recognized by Joe. Round percentage allocations to two decimal places and final amounts to the nearest dollar. Assume Joe follows IFRS.

Required: Fill in the following chart.

Analysis:

Step 1: Identify the contract with customers.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations.	Complete schedule 1 below
Step 5: Recognize revenue when each performance obligation is satisfied.

Schedule 1

Performance obligation	Stand-Alone (SA) Selling Price	% of Total SA Selling Price	Contract Price	Allocation of Contract Price
Window delivery
Installation

Answer 1

Step 1: Identify the contract with customers.	The customer purchases windows for a price of $2,400 and chooses Joe to do the installation.
Step 2: Identify the separate performance obligations in the contract.	Payment on window delivery & installation
Step 3: Determine the transaction price.	$2,400
Step 4: Allocate the transaction price to the separate performance obligations.	As in Schedule-1, below
Step 5: Recognize revenue when each performance obligation is satisfied.	$ 1846 on delivery for price of the windows & $ (2400-1846)=$ 554 on installation

Schedule 1
Performance obligation	Stand-Alone (SA) Selling Price	% of Total SA Selling Price	Contract Price, ie. Transaction price	Allocation of Contract Price
1	2	3	4	5=3*4
Window delivery	2000	76.92%	2400	1846
Installation	600	23.08%	2400	554
Total	2600	100.00%		2400

	Journal entry in Joe's books
Date	Account Title	Debit	Credit
1-Sep-20	Cash	2000
	Revenue		1846
	Deferred revenue(2000-1846)		154
	COGS	1100
	Inventory		1100
Oct 15,2020	Cash	400
	Deferred revenue	154
	Revenue		554