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%