Robi Inc. manufactures and services complex robotic equipment for other companie

Question

Robi Inc. manufactures and services complex robotic equipment for other companies. One of its most popular items is a robotic factory floor vacuum system which continuously moves around the floor removing small debris and oil. The system requires frequent maintenance. On 1/1/x4, Robi sold and delivered such a vacuum system to CTrip Inc., a bicycle manufacturing firm. Robi also agreed to include a 2-year maintenance contract in the sale. The maintenance contract starts 1/1/x4. The parties agreed to a contract price of $70,000. Robi sells this type of 2-year maintenance contract separately for $20,000. The stand alone price of the vacuum system is $60,000. What amount of revenue does Robi recognize for 20x4?

a. 70,000

b. 61,250

c. 80,000

d. 64,250

e. 58,500

a. 70,000

b. 61,250

c. 80,000

d. 64,250

e. 58,500

Explanation / Answer

b.$61,250.

given ,

contract price = $70,000.

standalone price of vacuum system =$60,000.

standalone price of maintenance contract = $20,000.

total of standalone prices = ($60,000 +$20,000).=>$80,000..

since it is a 2 year maintenance contract only 1 year's revenue on maintenance contract is to be recognised by the end of 20x4.

=> $60,000 + ($20,000 *1/2) => $70,000 will be recognised if both were sold on a stand alone basis.

and the remaining $10,000 will be recognised next year.

but,

we have a composite sale price of $70,000 instead of $80,000.

=> the amount to be recognised in 20x4 out ot total revenue of $70,000 is shown below.

=> (contract price) *( revenue that would have been recognised on stand alone basis) / (total stand alone price)

=>($70,000) *($70,000) / ($80,000)

=>$61,250.

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