Question

In: Accounting

Arrow Co. entered into a contract with a customer for $410,000. The contract is for the delivery of equipment and a three-year service maintenance contract for the equipment.

Arrow Co. entered into a contract with a customer for $410,000. The contract is for the delivery of equipment and a three-year service maintenance contract for the equipment. Arrow sells separately the equipment for a selling price of $400,000, and the maintenance contract for three years for $50,000. The equipment was delivered on 1 June 1 20X1. Arrow has a 30 November year-end.

 

Required:

Prepare the journal entries required to record the revenue related to this contract during the period 1 June 20X1 to 30 November 20X1.

Solutions

Expert Solution

This is a multiple deliverable and therefore the contract price must be allocated based on stand-alone fair values to the equipment and the service contract. 

 

 

Stand-along fair value

Percentage

Allocation

Equipment

400,000

89%

356,000

Contract

50,000

11%

44,000
 

450,000

100%

400,000

 

June 1, 20X1

Dr. Accounts receivable                       450,000

            Cr. Revenue – equipment                              356,000

             Cr. Contract liability                                          44,000

 

Every month from June 30 to November 30 (6 months in total)

Dr. Contract liability                                 1,222

Cr. Revenue (44,000/36)                                           1,222 

Junaid answered 1 year ago
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