Question

1.) Wyatt Company manufactures equipment. Wyatt's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $400,000 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. Wyatt has the following arrangement with Henderson Inc. • Henderson purchases equipment from Wyatt for a price of $1,200,000 and contracts with Wyatt to install the equipment. Wyatt charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Wyatt determines installation service is estimated to have a fair value of $50,000. The cost of the equipment is $750,000. • Henderson is obligated to pay Wyatt the $1,200,000 upon the delivery and installation of the equipment. Wyatt delivers the equipment on June 1, 2020, and completes the installation of the equipment on September 30, 2020. 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. Instructions: (a) How should the transaction price of $1,200,000 be allocated among the service obligations? (b) Prepare the journal entries for Wyatt Company for this revenue arrangement in 2020 assuming Wyatt receives payment when installation is completed.

Answer 1

(a)

Performance Obligation	Standalone Price $	Percent of Total Standalone Price	Transaction Price $	Allocated Transaction Price $
Delivery of equipment	1200000	96%	1200000	1152000
installation of equipment	50000	4%	1200000	48000
Total	1250000	100%		1200000

(b)

Date	General Journal	Debit	Credit
June 1, 2020	Accounts receivable	1152000
	Sales revenue		1152000
	(To record delivery of equipment)
June 1, 2020	Cost of goods sold	750000
	Inventory		750000
	(To record cost of equipment sold)
September 30, 2020	Cash	1200000
	Accounts receivable		1152000
	Service revenue		48000
	(To record installation of equipment)