Sarasota Company manufactures equipment. Sarasota\'s products range from simple

Question

Sarasota Company manufactures equipment. Sarasota's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,o00 to $1,500.000 and are quoted inclusive of instalation. The installation process does not involve changes to the features of the equipment and does not require tion about the equipment in order for the installed equipment to perform to specifications. Sarasota has the following arrangement with Winkerbean Inc. . Winkerbean purchases equipment from Sarasota for a price of $1,040,000 and contracts with Sarasota to install the equipment. Sarasota charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Sarasota determines installation service is estimated to have a standalone selling price of $51,000. The cost of the equipment is $620,000 Winkerbean is obligated to pay Sarasota the $1,040,000 upon the delivery and installation of the equipment. Sarasota delivers the equipment on June 1, 2017, and completes the installation of the equioment 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. Y (a) Your answer is correct. How should the transaction price of $1,040,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.) Equipment Installation

Explanation / Answer

The transaction price of $1,040,000 should be allocated among the service obligations as follows:

Equipment = $1,040,000 x [1,040,000/(1,040,000+51,000)] = $991,384

Installation = $1,040,000 x [51,000/(1,040,000+51,000)] = $48,616

The following journal entries should be prepared:

Date Account Titles and Explanation Debit Credit Jun. 1, 2017 Accounts Receivable 1040000      Unearned Service Revenue 48616      Sales Revenue 991384 (To record sales.) Cost of Goods Sold 620000       Inventory 620000 (To record cost of goods sold.) Sept. 30, 2017 Unearned Service Revenue 48616      Service Revenue 48616 (To record service revenue.) Cash 1040000      Accounts Receivable 1040000 (To record collection on accounts.)

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