Question
Mirabella, Inc. sells security equipment and computer integration services. It has not sold the integration service separately because its equipment cannot operate without being fully
Mirabella, Inc. sells security equipment
and
computer integration services.
It
has
not
sold
the
integration service
separately
because
its
equipment cannot operate without being fully integrated with
a computer system.
Such integration requires s
ignificant customization.
C
ompetitors in the area
are
not able to
provide
such
highly customized
computer integratio
n services.
Mirabella's
sales manager
re
ce
ntly
signed a contract with
Jemison Brothers
. Th
is
contract
provide
s
installation of
security cam
e
ra
s
and
computer integration services
at a price
around
$10 million
.
To
sweeten the deal, the sales manager offered to provide
a
5
-
year maintenance service for free, which
typically sells for $300,000
.
Mirabella
expects to have the system fully operational in 12 month
s
.
Jemison will not get control of the equipment until the
completion of
integration
service
.
During the initial negotiation
of this contract
, the contract price
was
set to
$10.1 million in
cash
payment
. However, as
b
oth parties finalize contract
negotiations, Jemison agrees to give Mirabella its
old security equipment in exchange for a credit of $100,000.
T
his old security equipment will not be
decommissioned until the new equipment is operational.Mirabella estimat
e
s the
fair value of the old
equipment at the contract inception date
to be
$115,000.
T
here is a
nother
provision in the contract that Jemison will receive a discount of $500,000 from the
contract price of $10 million if th
ey pay within three days of the date
the
contract is signed.Jemison
wired $9.5 million to Mirabella two days after the contract was signed.
Jemison has offered a bonus to Mirabella if the integration
finishes
early and Mirabella agreed to pay a
penalty if
it fails to meet
the
12
-
month deadline to complete the
integration. Mirabella has a large
number of contracts with bonus characteristics similar to the contract with Jemison.The following is the
schedule of the potential bonus or penalty.
While no specific outcome is probab
le,
Mirabella'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.
Required
:
Analyze steps 1 through 5
of the revenue recogniti
on
standards
, i.e.
,
identify the contract, identify the
performance obligations, and determine the transact
ion price.
Then allocate the transaction price
among performance obligations, and finally discuss how and when revenue should be recognized.
Completed
Bonus
Penalty
Percentage
10 months
$100,000
17%
11 months
50,000
27
12 months
0
$0
46
13 months
(50,000)
7
14 months
(100,000)
3
15 months
(500,000)
0
Total
100.0%
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