Question

The subject is Financial Accounting Analysis.

On December 31, 2017, Inter Tech Corporation, a network solutions company, signs a multi-year contract with Healy, Inc. Under the terms of the contract, Inter Tech will install hardware and software for Healy and provide software updates and tech support for two years. The total contract price for the solution is $6,750,000. In addition, InterTech will train Healy employees via on-site classes and provide one- on-one training for supervisors and higher level managers. Healy will pay $75 per hour per employee for classes and $375 per hour for one-on-one training. Healy must pay InterTech an upfront fee of $375,000 for the educational package, which will be used to offset educational hours in the future. How should InterTech Corporation recognize revenue on the $6,750,000 contract? How should InterTech Corporation record the $375,000?

Answer 1

The Total Contract Price $ 6,750,000 has to be divided into three elements like sales of hardware and sales of software and related tech support which is for the period of two years

Hardware and Software if assembled and installed together can be recognised as revenue immediately upon completion of Work (Hardware beings goods ,Revenue is recorded when goods are sold or dispatched and software being services ,revenue is recognised on completion of services or installation of services in this case ) and Tech support is for next two years so revenue though received in advance has to be considered as liability and recognised in phases whenever support is rendered and quantified and recognised to the extent tech support is provided. Revenue is recognised gradually over the period of two years and liability is extinguished when tech support is rendered and its revenue gets recognised

The Upfront fee received is a liability to Inter Tech as services are yet to be rendered . Until services are rendered revenue cannot be recognised .Just like the above tech support case ,Inter tech should initially record the $ 375,000 as liability and recognise as and when classes are taken based on the hours classes were held