Question

Dexter purchases equipment from Ray Company for a normal market price of $5,000,000. As an incentive, Ray's salesman throws in free installation as part of the deal. The price of the installation service is estimated to have a fair value of $600,000. Assuming the transaction to be multiple-deliverable arrangement, compute the amount to be allocated to installation. Round your percentage calculations to AT LEAST 4 decimal places.

A) 535,714

B) 600,000

C) 670,200

D) 614,570

Please show work.

When must a company recognize a contract liability on a sale?

		A- When the customer has paid for all of the work performed by company so far.
		B- When the customer has paid in advance of an obligation being completed.
		C- When the company has estimated the actual transaction price of the contract.
		D- When the company has completed work before being paid.

Answer 1

Answer:

1. Option A : $535,714
2. Option C :  When the company has estimated the actual transaction price of the contract.

Explanation:

1.

Purchase price = $5,000,000

Fair value of installation service = $600,000

:. Total cost = $5,600,000

% of amount to be recognized after discount= (5,000,000 ÷ 5,600,000) * 100%

= 89.28571%

:. Amount to be recognized = $600,000 * 89.28571%

= $535,714.29

= $535,714

2.

The contract can be recognized once if two conditions are satisfied:

> Occurrence of a critical event that must have triggered the transaction process.

> Amount must be measurable with certain degree of accuracy.

When the company has estimated the actual transaction price, there is an occurrence of triggering event and also the amount is measurable. So option C must be the answer.