Hospital Equipment Company (HEC) acquired several fMRI machines for its inventory at a cost of $3,600...

Hospital Equipment Company (HEC) acquired several fMRI machines for its inventory at a cost of $3,600 per machine. HEC usually sells these machines to hospitals at a price of $6,960. HEC also separately sells 12 months of training and repair services for fMRI machines for $1,740. HEC is paid $6,960 cash on November 30 for the sale of an fMRI machine delivered on December 1. HEC sold the machine at its regular price, but included one year of free training and repair service. Required: For the machine sold at its regular price, but with one year of “free” training and repair service, determine the dollar amount of revenue earned from the equipment sale versus the revenue earned from the training and repair services.

Expert Solution

As per US GAAP, revenue shoul be recorded on sale of goods when the goods has been transferred to the sellor and all the risks are transferred to the sellor and the receipt of the price of goods is measurable.

In case of service, it should be recorded when the service has been provided to the service receiver and the price of service is measureable.

When free products are offered as part of multiple deliverable transactions, total consideration should be separated and allocated between the elements in accordance with ASC 605- 25, Revenue Recognition—Multiple Element Arrangements.

Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative fair value of each element provided the delivered elements have value to customers on a standalone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately or competitor prices for similar products or services.

Here, in this case generally the comapny charges for the training and repair service, however for one of the customers company has provided the service inclusive in the price of goods.

Here, both are the primary business of company, selling of goods and training and repair services.

Since the price of $6,960 includes the cost of both, bifurcation will be done as under:-

Revenue for training and repair services.

= 1740/8700 * 6960 = $1,392

Revenue from selling price of machine.

= 6960/8700 * 6960 = $5,568

ekkarill92 answered 1 year ago

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