Question

4. Handler Company is an experienced manufacturer of equipment used in the construction industry. Handler's products range from small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from $600,000 to $4,000,000 and are quoted inclusive of installation and training. 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. Handler has the following arrangement with Chai Company

 (1) Chai purchases equipment from Handler for a price of $2,000,000 and chooses Handler to do the installation. Handler charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000

 (2) The fair value of the training sessions is estimated at 550.000. Other companies can also perform these training services

 (3) Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment

 (4) Handler delivers the equipment on September 1, 2014, and completes the installation of the equipment on November 1, 2014 transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years.

 Required:

 (a) What are the performance obligations for purposes of accounting for the sale of the equipment?

 (b) If there is more than one performance obligation, how should the payment of $2,000,000 be allocated to various components?

7. Long Term Contract  

Astra Construction Company contracted to build an office building for $3.000.000. Construction began in 2003 and was completed in 2005. Data relating to the contract are summarized below 

What amount of income on the long term contract would Astra report in 2003, 2004 and 2005 if the firm uses the percentage of completion method of accounting for long term contracts? 

Answer 1

Answer to 4(a)
Handlers main obligation is to sell the equipment. Other services such as installation and testing can be performed by other entities.
Hence installation and testing represents distinct performance obligations.
So to account for sale of equipment, delivery must be made and then revenue can be recognised
Answer to 4(b)
If there are more than one performance obligation then the allocation will be as follows-
Performance obligation	Standalone price	Percentage of total	Transaction price	Allocation amount
Delivery	20,00,000	97%	20,00,000	19,32,367
Installation	20,000	1%	20,00,000	19,324
Training	50,000	2%	20,00,000	48,309
Total	20,70,000			20,00,000
Answer to 11
Under percentage of completion method
Revenue to be recognised= (percentage of work completed)* Total contract value
Percentage of work completed= total expenses incurred/total estimated cost
	2003	2004	2005
Total expenses incurred	7,00,000	9,80,000	14,00,000
Total estimated cost	18,00,000	14,00,000	-
Percentage of work completed	39%	70%	100%
Percentage of work completed each year	39%	31%	30%
Total Contract value	3000000	3000000	3000000
Income on long term contract	11,70,000	9,30,000	9,00,000