Question

Hospital Equipment Company (HEC) acquired several fMRI machines for its inventory at a cost of $3,800 per machine. HEC usually sells these machines to hospitals at a price of $7,120. HEC also separately sells 12 months of training and repair services for fMRI machines for $1,780. HEC is paid $7,120 cash on November 30 for the sale of an fMRI machine delivered on December 1. HEC sold the machine at its regular price, but included one year of free training and repair service.

1.For the machine sold at its regular price, but with one year of “free” training and repair service, determine the dollar amount of revenue earned from the equipment sale versus the revenue earned from the training and repair services.

2.Prepare journal entries would HEC record on November 30 and December 1? (Assume HEC uses a perpetual inventory system for recording the cost of goods sold

Answer 1

1	As per US GAAP
	Revenue should be recorded on the sale of goods when the goods have been transferred to
	the seller and all the risks are transferred to the seller and the receipt of the price of
	goods are measurable.
	In case of service, it should be recorded when the service has been provided to the
	service receiver and the price of service is measurable.
	When free products are offered as part of multiple deliverable transactions, the total consideration
	should be separated and allocated between the elements in accordance with ASC 605- 25,
	Revenue Recognition—Multiple-Element Arrangements.
	Since the price of $7,120 includes the cost of both, bifurcation will be done as under:-
	Revenue for training and repair services = $1,424
	($1,780 x $7,120/$8,900 )
	Revenue from selling price of the machine. = $5,696
	($7,120 x $7,120/$8,900 )
2	Date	General Journal	Debit	Credit
	Nov 30	Cash	$7,120
		Unearned Revenue		$7,120
	Dec 01	Unearned Revenue	$5,696
		Sales Revenue		$5,696
	Dec 01	Cost of goods sold	$3,800
		Inventory		$3,800