Question

Ladd Corporation sells construction equipment to a customer for $200,000. The equipment comes with a standard 10-year warranty covering all maintenance and repairs during that time. Initially, Ladd estimates that it will incur $10,000 in costs over the life of the warranty agreement. It considers a 40% markup over cost for such an agreement typical, and applies the residual approach to allocate the contract price to the two performance obligations. One year after the sale, Ladd has incurred a total of $300 servicing the equipment. It still believes $10,000 is a reasonable estimate for the total cost of servicing the equipment over the 10 years. Two years after the sale, Ladd has incurred a total (including the $300 from the first year) of $1,200 in costs to service the equipment, and based on experience, now estimates the total cost to service over the 10 years to be $9,500 Ladd recognizes revenue on the warranty over time, in accordance with ASC Topic 606. It determines the extent to which the performance obligation is satisfied based on the proportion of total costs expected to be incurred that have been incurred to date. Required: 1. What amount of the price is allocated to each of the performance obligations? 2. What amount of revenue is recognized on the warranty in Year 1? 3. What amount of revenue is recognized on the warranty in Year 2?

Answer 1

solutions Total contract price $200 OOD components i ů Construction equipment i lo year warrantyn. cost 10 yr warranty standalone price $ 10000 mosts Ср очо). $4ooo $ luar Residual price ( 200 000-14000) = $ 186 000 * The given case the total Transaction poice includes two performance obligations, one is the construction equipment it self and other is the warranty obligation whose price is included in & 200000.

recognized in warranty The amount of revenue year fi in - Total costs expected to be incurred in warranty $19000 Total costs incurred till date $300 - - proportion of costs incurred to date 1300 10000 0.03 - Revenue to be 420 recognized out of 14000 tot 14000 (14000 0.03) 3 The amount of Revenue recognized in warranty in yearr-28 Total costs expected to be incurred in warranty (8)9 500 Total costs incurred till date $1200 - proportion of costs incurred to date o.12631 1969 - Revenue to be recognized out of 14000 (0-12631 x 14000) - Revenue Recognized till year a Revenue to be reconized in year a 420 & 3u8