Question
Buffalo Company manufactures equipment. Buffalos products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000
Buffalo Company manufactures equipment. Buffalos products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Buffalo has the following arrangement with Winkerbean Inc.
Winkerbean purchases equipment from Buffalo for a price of $1,040,000 and contracts with Buffalo to install the equipment. Buffalo charges the same price for the equipment irrespective of whether it does the installation or not. The cost of the equipment is $652,000. | ||
Winkerbean is obligated to pay Buffalo the $1,040,000 upon the delivery and installation of the equipment. |
Buffalo delivers the equipment on June 1, 2020, and completes the installation of the equipment on September 30, 2020. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately. Assuming Buffalo does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $38,700; Buffalo prices these services with a 25% margin relative to cost.
How should the transaction price of $1,040,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.) Equipment $
Installation $
Prepare the journal entries for Buffalo for this revenue arrangement on June 1, 2020, assuming Buffalo receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started