Question
IBM Corp. is a public company that manufactures and sells computer equipment and provides support services. IBM's customers can purchase computer equipment or support services
IBM Corp. is a public company that manufactures and sells computer equipment and provides support services. IBM's customers can purchase computer equipment or support services separately, but the company also offers computer equipment that includes support as a package.
On October 1, 2020, Next Web Ltd. enters into a contract to purchase a computer equipment and support package from IBM. The contract is for $100 million and includes the computer equipment and 10 years of support services once the computer equipment is delivered.
The computer equipment that was purchased by Next Web would normally sell for $95 million and 10 years of support services would be valued at $15 million if purchased separately. IBM's management expects the computer equipment to be delivered by October 1, 2021. The support is expected to be provided evenly for 10 years after delivery of the computer equipment.
The contract requires Next Web to make a $15-million payment to IBM within 30 days of signing the contract and then $35 million on October 1, 2021, with the balance to be paid annually over 10 years once the computer equipment is delivered on October 1, 2021. Next Web has secured financing to pay for the computer equipment and so IBM's management has no concerns related to collectability.
Required
- Assuming that IBM provides the goods and services as and when expected under the contract and Next Web makes its payments as required, determine when and how much revenue IBM would be able to recognize as part of the contract. Use the model for revenue recognition introduced in class and the textbook in preparing your response. Round percentages to the nearest two decimal places.
- Based on your analysis in part 1 prepare the required journal entries on October 1, 2020, October 31, 2020 and October 1, 2021.
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