Question
Copyrigwith Avril Company manufactures equipment. Unit selling prices range from $200,000 to $1,500,000 and are quoted exclusive of installation. The installation process does not involve
Copyrigwith Avril Company manufactures equipment. Unit selling prices range from $200,000 to $1,500,000 and are quoted exclusive 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. Avril has the following arrangement with Arc SA. Arc purchases equipment from Avril for a price of $1,300,000 and contracts with Avril to install the equipment. Avril charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Avril determines installation service is estimated to have a standalone selling price of $45,000. The cost of the equipment is $700,000. Arc is obliged to pay Avril the $1,300,000 upon the delivery and installation of the equipment. Avril delivers the equipment on June 1, 2019 (transfer of control is complete), and completes the installation of the equipment on September 30, 2019. 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. a. According to standard on Revenue recognition entitled Revenue from Contracts with Customers, how should the transaction price of $1,300,000 be allocated among the service obligations? b. Prepare the journal entries for Avril for this revenue arrangement on June 1, 2019 and September 30, 2019, assuming Avril receives payment when installation is completed.
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