Assembly Lines Incorporated (ALI) is a public company with a calendar year-end. In its current fiscal quarter, ending September 30, 2012, it entered into a sales agreement with Candy Maker International (CMI). Under the sales agreement, ALI is selling an assembly line system to CMI that consists of the following three components:

Mixer Segment

Molding Segment

Packaging Segment

ALI will install the assembly line system at CMIs Chicago manufacturing facility, where it will be used by CMI to manufacture candy bars. The sales agreement between ALI and CMI provides for the following pricing:

Mixer Segment $40,000

Molding Segment 30,000

Packaging Segment 20,000

Installation 10,000

Total $100,000

The sales agreement is dated September 14, 2012. ALI agrees to deliver the mixer segment and molding segment to CMI by September 25, 2012, as ALI has those two components of the assembly line system on hand at the time the sales agreement is entered into. The sales agreement does not provide CMI with a general right of return for any components of the assembly line. A competitor offers a similar assembly line system.

ALI delivers the two components of the assembly line system on September 20, 2012, and agrees to deliver the packaging segment to CMI by December 20, 2012. The delivery date for the packaging segment is delayed because ALI does not have that component of the assembly line system on hand at the time the sales agreement is entered into. As such, ALI has to manufacture that component of the line. Because of the backlog of orders ALI has in its manufacturing department at the time it enters into the sales agreement with CMI, it cannot commit to delivering the packaging segment to CMI until December 20, 2012. ALI actually delivers the packaging segment on December 15, 2012, and agrees to install the complete assembly line system at CMIs Chicago facility on January 5, 2013. ALI cannot install it sooner because its installation technicians are either otherwise committed to other customer installation orders or on vacation for the holidays.

ALI requires cash upon delivery to CMI, so CMI pays the prices listed in the sales arrangement as the items are delivered. That is, on September 20, 2012, CMI pays ALI $70,000 for the mixer and molding segments; on December 15, 2012, CMI pays ALI $20,000 for the packing segment; and on January 5, 2013, CMI pays ALI $10,000 for installation. These amounts are not refundable. With respect to the assembly line system, the individual components (mixer segment, molding segment, and packaging segment) do not function independently of one another (i.e., each component needs the other two components to function properly). ALI does not sell the individual components separately. In other words, ALI does not sell just the mixer segment or just the packaging segment, but always sells the mixer segment, molding segment, and packaging segment together as an integrated system. There is not a resalemarket for the individual components of the assembly line system, and ALIs competitors do not produce assembly line systems (or components) that are compatible with ALIs assembly line systems (or components).

Installation is required for the assembly line system to function properly. ALI almost always sells and performs the installation services for its assembly line systems. However, some customers have hired other technicians to install the assembly line system using schematics and instructions provided by ALI. Customers are most likely to hire other technicians when ALI is not able to perform the installation services on the accelerated timeline required by the customer.

The inventory and installation costs associated with fulfilling the arrangement with CMI are as follows:

Cost

Mixer Segment $30,000

Molding Segment 15,000

Packaging Segment 10,000

Installation 5,000

Total $60,000

When ALI sells the same assembly line system to a customer without installation services, it prices the system at $95,000. ALI has heard from a prior customer that hired an outside technician to install the assembly line system that the outside technician charged $12,000.

Required:

ALI is concerned with revenue recognition issues related to its sales agreement with CMI. In its deliberations, ALI asks for your help. Base your analysis on the relevant authoritative literature that is applicable during the time periods in the assignment and discuss the support in that literature for your conclusions. Be sure to cite the relevant components of the Codification in your discussions.

What are the accounting issue(s) and the relevant components of the authoritative literature?

Be detailed.