Question
In: Accounting
Nash Company manufactures equipment. Nash’s products range from simple automated machinery to complex systems containing numerous...
Nash Company manufactures equipment. Nash’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. Nash has the following arrangement with Winkerbean Inc.
| ● | Winkerbean purchases equipment from Nash for a price of $1,040,000 and contracts with Nash to install the equipment. Nash charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Nash determines installation service is estimated to have a standalone selling price of $45,400. The cost of the equipment is $581,000. | |
| ● | Winkerbean is obligated to pay Nash the $1,040,000 upon the delivery and installation of the equipment. |
Nash 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.
Assuming Nash does not have market data with which to
determine the standalone selling price of the installation
services. As a result, an expected cost plus margin approach is
used. The cost of installation is $39,200; Nash prices these
services with a 25% margin relative to cost.
(a)
How should the transaction price of $1,040,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)
| Equipment | $ | |
| Installation | $ |
(b)
Prepare the journal entries for Nash for this revenue arrangement on June 1, 2020, assuming Nash 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.)
|
Account Titles and Explanation |
Debit |
Credit |
|
(To record sales) |
||
|
(To record cost of goods sold) |
||
|
(To record service revenue) |
||
|
(To record payment received) |
Solutions
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