computer integration services together. It does not sell these separately. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors could theoretically provide computer integration services. Historically, HP has not sold maintenance services. The sales manager for HP has just obtained a signed contract from Superior Manufacturing (SM) to provide and perform computer integration services for surveillance equipment at a cost of $10 million, and have everything operational within one year, at which time full payment is due. SM will not get control of the video surveillance equipment until the integration is completed and HP turns control of the system over to SM. Management expects to be able to have the system fully operational and available for use by SM in the 12th month of the contract. HP believes this system would also be valuable to SM's competitors. The contract price of $10 million includes a five-year maintenance agreement that will commence after the installation is completed. SM has a great credit rating and always pays its bills. HP's sales manager is very pleased because he will receive a 2% bonus based on the gross sales contract price, and it is payable upon receipt of a signed contract. HP maintains a marketing group to work on contract proposals. The total annual salaries for the marketing group are $400,000. On average, the marketing group works on 20 proposals each year. This contract is expected to have a 15% to 20% margin. 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 HP 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, HP's management believes it is probable that the estimated fair value of the old equipment at the contract inception date 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 HP and SM) from the contract price of $10 million if they paid within three days of when the contract was signed. HP 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 HP two days after the contract was signed. In the interest of full and expanded disclosure, HP has decided not to apply the practical expedient in ASC 606103218 Due to deep security concerns and recent losses of proprietary information, SM also offered a bonus to HP if the integration was completed early and HP agreed to pay a penalty if the integration was completed late. HP 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, HP's management assessment of the likelihood of completing the integration in the specified time frame is based on significant historical experience with similar integration jobs. HP typically sells the video surveillance equipment and integration services with a forecasted cost of $8.136 million for $9.85 million. HP has just begun selling maintenance services and has forecasted the cost of these services at $164,000. In the initial contract negotiations, HP told SM they would be asking for $300,000 related to the five-year maintenance contract. SM informed HP 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. 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 HP 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: For all questions, support your answers by referencing the applicable accounting literature. 1. With regard to contract costs, record any required journal entries as of the date of receiving the signed contract. 2. Determine the total transaction price and provide a detailed analysis to support your conclusion. 3. Record any required journal entries for the first two days of the contract beyond what was recorded in question 1 . 4. Allocate the transaction price to each separate performance obligation. 5. Recognize revenue as performance obligations are satisfied. Record any required journal entries for revenue, deferred costs, etc., through the 11th and 12th months of the contract. Bonus question: What is the remaining balance in the Deferred Revenue account? computer integration services together. It does not sell these separately. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors could theoretically provide computer integration services. Historically, HP has not sold maintenance services. The sales manager for HP has just obtained a signed contract from Superior Manufacturing (SM) to provide and perform computer integration services for surveillance equipment at a cost of $10 million, and have everything operational within one year, at which time full payment is due. SM will not get control of the video surveillance equipment until the integration is completed and HP turns control of the system over to SM. Management expects to be able to have the system fully operational and available for use by SM in the 12th month of the contract. HP believes this system would also be valuable to SM's competitors. The contract price of $10 million includes a five-year maintenance agreement that will commence after the installation is completed. SM has a great credit rating and always pays its bills. HP's sales manager is very pleased because he will receive a 2% bonus based on the gross sales contract price, and it is payable upon receipt of a signed contract. HP maintains a marketing group to work on contract proposals. The total annual salaries for the marketing group are $400,000. On average, the marketing group works on 20 proposals each year. This contract is expected to have a 15% to 20% margin. 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 HP 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, HP's management believes it is probable that the estimated fair value of the old equipment at the contract inception date 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 HP and SM) from the contract price of $10 million if they paid within three days of when the contract was signed. HP 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 HP two days after the contract was signed. In the interest of full and expanded disclosure, HP has decided not to apply the practical expedient in ASC 606103218 Due to deep security concerns and recent losses of proprietary information, SM also offered a bonus to HP if the integration was completed early and HP agreed to pay a penalty if the integration was completed late. HP 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, HP's management assessment of the likelihood of completing the integration in the specified time frame is based on significant historical experience with similar integration jobs. HP typically sells the video surveillance equipment and integration services with a forecasted cost of $8.136 million for $9.85 million. HP has just begun selling maintenance services and has forecasted the cost of these services at $164,000. In the initial contract negotiations, HP told SM they would be asking for $300,000 related to the five-year maintenance contract. SM informed HP 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. 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 HP 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: For all questions, support your answers by referencing the applicable accounting literature. 1. With regard to contract costs, record any required journal entries as of the date of receiving the signed contract. 2. Determine the total transaction price and provide a detailed analysis to support your conclusion. 3. Record any required journal entries for the first two days of the contract beyond what was recorded in question 1 . 4. Allocate the transaction price to each separate performance obligation. 5. Recognize revenue as performance obligations are satisfied. Record any required journal entries for revenue, deferred costs, etc., through the 11th and 12th months of the contract. Bonus question: What is the remaining balance in the Deferred Revenue account