Bridgeport Company manufactures equipment. Bridgeport’s products range from simp

Question

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

Bridgeport 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 Bridgeport 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; Bridgeport prices these services with a 20% margin relative to cost.

(a) How should the transaction price of $ 1,100,000 be allocated among the service obligations?

Equipment: $
Installation: $

(b) Prepare the journal entries for Bridgeport for this revenue arrangement on June 1, 2017, assuming Bridgeport receives payment when installation is completed.

Winkerbean purchases equipment from Bridgeport for a price of $ 1,100,000 and contracts with Bridgeport to install the equipment. Bridgeport charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Bridgeport determines installation service is estimated to have a standalone selling price of $ 50,600. The cost of the equipment is $ 652,000. Winkerbean is obligated to pay Bridgeport the $ 1,100,000 upon the delivery and installation of the equipment.

Explanation / Answer

SOLUTION

A. Amount to be allocated = (Fair vale of asset / Total fair value) * Revenue to be allocated

Equipment-

Amount to be allocated = [$652,000 / ($652,000 + $50,600)] * $1,100,000

= ($652,000 / $702,600) * $1,100,000

= $1,020,780

Installation-

Amount to be allocated = [$50,600 / ($652,000 + $50,600)] * $1,100,000

= ($50,600 / $702,600) * $1,100,000

= $79,220

B. Journal Entries-

Date Accounts titles and Explanation Debit ($) Credit ($) June 30 Accounts receivable 1,100,000 Sales revenue (Equipment) 1,020,780 Sales revenue (Installation) 79,220 (To record the sale of the equipement and service revenue) Sept. 30 Cash 1,100,000 Accounts receivable 1,100,000 (To record the receipt of sale and service revenue)

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