Question

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

●		Winkerbean purchases equipment from Sarasota for a price of $950,000 and contracts with Sarasota to install the equipment. Sarasota charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Sarasota determines installation service is estimated to have a standalone selling price of $52,000. The cost of the equipment is $660,000.
●		Winkerbean is obligated to pay Sarasota the $950,000 upon the delivery and installation of the equipment.

Sarasota 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.

How should the transaction price of $950,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.)

Equipment		$
Installation

Answer 1

Allocate the transaction price of $980,000 based on the standalone price of equipment and installation price as follows

Particulars	Amount
Equipment	$900,699
Installation	$49,301

Note: Allocate the price as follows

Particulars	Amount	Ratio	Transaction price	Allocated Price
Standalone selling price of equipment ($950,000 ÷ $1,002,000 = 94.81%)	$950,000	94.81%	× $950,000	= $900,699
Standalone installation price ($52,000 ÷ $1,002,000 = 5.19%)	$52,000	5.19%	× $950,000	= $49,301
Total	$1,002,000			$950,000