Question

Exercise 18-14 (Part Level Submission)

Crane Company manufactures equipment. Crane’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. Crane has the following arrangement with Winkerbean Inc.

●		Winkerbean purchases equipment from Crane for a price of $990,000 and contracts with Crane to install the equipment. Crane charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Crane determines installation service is estimated to have a standalone selling price of $53,300. The cost of the equipment is $628,000.
●		Winkerbean is obligated to pay Crane the $990,000 upon the delivery and installation of the equipment.

Crane delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. 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 Crane 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 $35,100; Crane prices these services with a 30% margin relative to cost.

How should the transaction price of $990,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)

Equipment		$
Installation		$

Please show how you got the answers.

Answer 1

v Sowtion . Equipment = [fair value of equipment/ Total fair value] x Transaction price .... = [ 990000 16990000 + 53300)] x 990000 .. ( 990000 / 1043300) x 490000 = 939423

Installation = [fair value of Installation / Total fair value] 1. Transcation price = [ 53300 (990000 + 53300)] x 990000 = [ 53300 / 1043300 ] 990000 50577