Blackmon Company provides locator services to the city transportation departments. Blackmon’s service involves installing a dedicated hardware transmitter in each city bus. This transmitter provides real time information to a central logistics center that provides a manager with detailed information as to bus location, speed, current weather, and traffic patterns. The manager can then reroute buses to improve efficiency of operations and increase customer satisfaction. Customers generally sign two separate contracts: one contract governs the sale of the hardware devices, while the second governs the provision of the locator services. On January 1, 2017, a customer purchased Blackmon’s service by signing a contract for 100 devices for $ 480,000, the normal selling price. In addition, the customer signed a separate 12 month service contract for $ 2,000 per month ($ 20 per month per unit, which is the standard selling price for the service). This amount is billed on a monthly basis, and the customer pays for January service on January 31, 2017. The hardware device can only be used with Blackmon’s services and there are currently no other competitors making devices that work with the Blackmon service. The customer may cancel at any time; however, the amount paid for the device is nonrefundable. The customer is given the right to renew the service contract at the existing rate each December, and the average life of a customer contract is 5 years. The customer takes delivery of the device on January 1, 2017, and begins the locator service on that date.
Required:
1. Identify the contract( s) for accounting purposes.
2. How many performance obligations exist? When will the performance obligation( s) be satisfied?
3. Prepare Blackmon’s journal entries for January 2017.
4. Assume that other competitors sell a similar locator service comparable to Blackmon’s. Would this fact change your previous answers?