Question

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

●		Winkerbean purchases equipment from Oriole for a price of $920,000 and contracts with Oriole to install the equipment. Oriole charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Oriole determines installation service is estimated to have a standalone selling price of $50,500. The cost of the equipment is $643,000.
●		Winkerbean is obligated to pay Oriole the $920,000 upon the delivery and installation of the equipment.

Oriole delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. 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.

Assuming Oriole does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $32,500; Oriole prices these services with a 20% margin relative to cost.

How should the transaction price of $920,000 be allocated among the service obligations?

Prepare the journal entries for Oriole for this revenue arrangement on June 1, 2017, assuming Oriole receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
(To record sales)
(To record cost of goods sold)
(To record service revenue)
(To record payment received)

Answer 1

SOLUTION

1. Equipment = Equipment price / Total cost * Transaction price

= [920,000 / (920,000+50,500)] * 920,000

= 920,000 / 970,500 * 920,000

= 872,128

Installation = Installation price / Total cost * Transaction price

= [50,500 / (920,000+50,500)] * 920,000

= 50,500 / 970,500 * 920,000

= 47,872

2. Journal entries-

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Accounts receivable	920,000
	Sales revenue		872,128
	Unearned service revenue		47,872
	(To record sales)
2.	Cost of goods sold	643,000
	Inventory		643,000
	(To record cost of goods sold)
3.	Unearned service revenue	47,872
	Service revenue		47,872
	(To record service revenue)
4.	Cash	920,000
	Accounts receivable		920,000
	(To record payment received)