E18-5B (L03) (Allocate Transaction Price) Talkington Company manufactures equipment. Talkingtons products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $400,000 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. Talkington has the following arrangement with Henderson Inc.

-Henderson purchases equipment from Talkington for a price of $1,200,000 and contracts with Talkington to install the equipment. Talkington charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Talkington determines installation service is estimated to have a fair value of $50,000. The cost of the equipment is $750,000.

-Henderson is obligated to pay Talkington the $1,200,000 upon the delivery and installation of the equipment.

Talkington delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. 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.

Instructions

(a) How should the transaction price of $1,200,000 be allocated among the service obligations?

(b) Prepare the journal entries for Talkington for this revenue arrangement in 2017 assuming Talkington receives payment when installation is completed.

(c) Repeat requirements (a) and (b) assuming Talkington 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 $32,000; Talkington prices these services with a 25% margin relative to cost.