Question

Make the appropriate journal entries, if any, to account for the installation of the machines (including any necessary changes to income tax expense) and the first payment by the university. Assume that the first machine cost Terry $132,000, the second $117,000, and the third $210,000. The average cost of the maintenance contract is $22,000. Terry’s work building these machines has already been appropriately recorded in inventory.

Information: Terry determined early in its history that it was more effective for them to build their own specialized production equipment than for them to share their proprietary production data with a construction company. While this process leads to a larger upfront cost for new equipment, the special production methods used by the company have earned much more than the initial extra outlay.

While the company has historically kept this production process in-house, they have recently been approached by a local university with a request to provide a set of machinery that the university can use to produce their own specialty bags. Since many members of Terry’s Board of Directors (and several large shareholders) are alumni of this university, Terry’s management has decided that they will go through with the sale of a three machine system to the university.

As part of the deal, Terry’s management has insisted that the university also purchase a 3-year maintenance contract (which will begin as soon as the last machine is installed). This requirement will allow Terry’s engineers and machinists to take care of the equipment, reducing the chance of losing their competitive advantage. The total contract price for the machines and the maintenance contract is $660,000.

As part of the contract, both parties have agreed that the university will have the right to return the equipment if they are not satisfied with the performance of the machines. Terry will also provide an additional refund for the maintenance contract if the company returns the equipment within the next few years.

While Terry has never sold its equipment before, machinery for making bags can be purchased from many other companies. In addition, many of those companies also provide service contracts to care for the machines they sell. Other versions of the machines typically sell for $165,000; $130,000; and $300,000. A 3-year maintenance contract sells, on average, for $72,000.

By the end of Year 3, Terry had installed the first and second machines and the university has paid $293,000. Terry’s management team anticipates that the final machine will be installed in January of Year 4, and the maintenance contract will begin immediately after the final installation. The university will pay the balance of the contract once the last one is installed.

Answer 1

page 1 Given data that Assume that the figlot machine cost teg9ly $ 132,000 the second $ 114,000 and the Thisjd. $ 210,000 . While this process leads to a lagiges upfront cost fogy new equipment, the special peoduction methods used by the company have eagned much mogje than the initial exteja outlay. Teploty have neves sold the machines eagliegy and be has entegjed into single contact to sale machine-1, Machine-a , Machine - 3 & Maintanence contgasts fog which fais value

page2 Hai 9 Value needs to be Allocated to each Contojact: We have majket police Available to equivalent to same delivegable which is used to degive the fais value of delivesjable in contajact. Delivesjable in contracts Masket value of each delivegable fain value Allocation of each delivegjable Machine - 1 165,000 163,268 Machine-2 130,000 128,636 296,852 Machine - 3 300,000 72,000 Maintanence contact 71,244 Total 664,000 660,000 Now Get us pass diffestent Journal entries Sy No. Account debit csjedit 1. University Ale 291,904 Revenue from machine sales ( being Revenue of Machine - 1 & Machine -2 on the base of faies value allocation Recognised on installation of machines)

page 3 2. Cash Alc 293,000 Univegsity Account 293,000 (being sjeceipt of cash) 3. Cost of machine sold Account Inventory 249,000 ( being issue of machine - 1 & Machine -a costing 132,000 & 119,000 gjespectively from inuentusy)