Background:

In the initial contract negotiation stage, the contract price with SM was $10.1 million in cash. However, as part of the final contract negotiations, SM agreed to give EYE SPY its old surveillance equipment in exchange for a credit of $100,000. It is expected that this old surveillance equipment will not be decommissioned until the new equipment is operational. Based on its extensive experience, EYE SPYs management believes it is probable that the estimated fair value of the old equipment is $115,000.

There was also a provision in the contract that SM would receive a discount (similar to that which, would be reflected in a separate financing transaction between EYE SPY and SM) from the contract price of $10 million if they paid within three days of when the contract was signed. EYE SPY determined a discount of $500,000 for this financing based on applying the typical credit rate for the equipment and integration services to be delivered at the end of year one and the monthly delivery of maintenance services in year two through six of the contract. SM wired $9.5 million to EYE SPY two days after the contract was signed. In the interest of full and expanded disclosure, EYE SPY has decided not to apply the practical expedient in ASC 606-10-32-18.

Due to deep security concerns and recent losses of proprietary information, SM also offered a bonus to EYE SPY if the integration was completed early and EYE SPY agreed to pay a penalty if the integration was completed late. EYE SPY has a large number of contracts with bonus characteristics similar to the contract with SM. The following is the schedule of the potential bonus or penalty. While no specific outcome is probable, EYE SPYs management assessment of the likelihood of completing the integration in the specified time frame is based on significant historical experience with similar integration jobs.

Completed	Bonus	Penalty	Percentage
10 months	$100,000		17%
11 months	50,000		27%
12 months	0	$ 0	46%
13 months		(50,000)	7%
14 months		(100,000)	3%
15 months plus		(500,000)	0%
Total			100%

Requirements:

Review ASC 606-10-32-2 through 21.

Perform step three of the revenue recognition model and determine the transaction price. By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Record any required journal entries for the first two days of the contract beyond what was recorded in Part I. Prepare any required updated T accounts

Part III:

Part II should be completed before beginning Part III.

Background:

As stated in Part I, EYE SPY sells the video surveillance equipment and computer integration services together. It does not sell these separately. EYE SPY typically sells this type of video surveillance equipment and integration services with a forecasted cost of $8.136 million for $9.85 million. EYE SPY has just begun selling maintenance services and has forecasted the cost of these services at $164,000.

In the initial contract negotiations, EYE SPY told SM they would be asking for $300,000 related to the five-year maintenance contract. SM informed EYE SPY that several competitors were offering attractive pricing to obtain this maintenance work. In order get the maintenance work, the draft contract was revised to reflect that the maintenance services would be offered at a cost of $200,000.

Requirements:

Review ASC 606-10-32-28 through 41.

Perform step four of the revenue recognition model and allocate the transaction price to each separate performance obligation. By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Part IV:

Part III should be completed before beginning Part IV.

Background:

At the end of 11 months, the system is fully operational. The system has been tested and accepted by SM. The old surveillance equipment was decommissioned when the new system was installed. The old equipment was shipped to EYE SPY in month 11. The old surveillance equipment was sold the next month for $120,000. For the sake of simplicity, no financing component needs to be allocated to the maintenance contract.

Requirements:

Review ASC 606-25-27 through 30; ASC 606-10-32-14, 42 and 43; and also ASC 606-55-248-250.

Perform step five of the revenue recognition model and recognized revenue as performance obligations are satisfied. By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Record any required journal entries for revenue, deferred costs, etc., through the 11^th and 12^th months of the contract. Prepare any required, updated T accounts.

Note: While some journal entries may have been recorded monthly, for purposes of this case, show the cumulative journal entry recorded through the 11^th and 12^th months. Show all calculations.