San Miguel Company manufactures specialized industrial equipment. The equipment often is sold under credit terms that provide for payment over a two- or three-year period. A substantial prepayment is required before equipment is manufactured. The purchaser accepts title to the equipment at the time it is received. San Miguel also sells service contracts on the equipment it sells. These multiyear contracts stipulate that San Miguel will provide periodic maintenance on the equipment and will repair the equipment if it breaks down. Explain
(a) When San Miguel should recognize revenue from its equipment sales and
(b) When it should recognize service contract revenue. In each case, explain why this revenue timing is proper.