Question

2. Periwinkle Company manufactures equipment. Periwinkle's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $ 140,000 to $ 1,200,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. Periwinkle has the following relationship with Rose Inc. Rose can purchase equipment from Periwinkle for a price of $ 200,000 and contracts with Periwinkle to install the equipment. Using market data, Rose determines installation service is estimated to have a fair value of $ 20,000. The cost of the equipment is $ 78,000. Rose is obligated to pay Periwinkle the $ 200,000 upon delivery and installation of the equipment. Periwinkle delivers the equipment on August 1, 2020, and completes the installation of the equipment on October 1, 2020. The equipment has a useful life of 7 years. Assume the equipment and the installations are two distinct performance obligations that should be accounted for separately. Instructions a) How should the transaction price of $ 200,000 be allocated among the service obligations? b) Prepare the journal entries for Periwinkle for this revenue arrangement for 2020, assuming Periwinkle receives payment when installation is completed.

Answer 1

SO!! . Given data. » Rose can purchase equipment from pesi wince for a Price of $ 200.000, -> Rose determines installation service is estimated to have facer value of $2 -> The cost ob the equipment is $776.000, a Rose is obligated to pay Periwinkle the $200.000 upon delivery and installation or the equipment. (a) the transaction Price of $200.000 be allocated among the service obligations. Transaction price for equipment = Perrchase equipment from periwincie Price 1 estimated fair value of the cost of equipment] X (the cost of equipment) 200.000 X 78.000 20.000 +78000 x 78.000 200.000 98000 9.04081 X 78.000 =159.184

Transaction price for wipment - $ 159.1846 for installation service - Transaction price from Periwinkle for a price Purchase eruipment of the equipment estimated fair value & the cost X estimated fair value, - 200.000_ X 20.000 90.000 +78-000 900.000 x 20.000 98000 9.04081 X 20.000 $ 40.816. transaction price for installation service = $40.816) 0. The reauired journal entry is provided below. Titles and explanation. Debit credit. Accocent cash $200 000 $40.816 service revenue - Installation Sales revenue -equipment $ 159-184. (to recod sales and service devenue)