Ladd Corporation sells construction equipment to a customer for $200,000. The equipment comes with a standard 10-year warranty covering all maintenance and repairs during that time. Initially, Ladd estimates that it will incur $10,000 in costs over the life of the warranty agreement. It considers a 40% markup over cost for such an agreement typical, and applies the residual approach to allocate the contract price to the two performance obligations.

One year after the sale, Ladd has incurred a total of $300 servicing the equipment. It still believes $10,000 is a reasonable estimate for the total cost of servicing the equipment over the 10 years. Two years after the sale, Ladd has incurred a total (including the $300 from the first year) of $1,200 in costs to service the equipment, and based on experience, now estimates the total cost to service over the 10 years to be $9,500.

Ladd recognizes revenue on the warranty over time, in accordance with ASC Topic 606. It determines the extent to which the performance obligation is satisfied based on the proportion of total costs expected to be incurred that have been incurred to date.

Required:

1. What amount of the price is allocated to each of the performance obligations?

2. What amount of revenue is recognized on the warranty in Year 1?

3. What amount of revenue is recognized on the warranty in Year 2?