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 significant customization. Competitors in the area are not able to provide such highly customized computer integration services. Mirabella's sales manager recently signed a contract with Jemison Brothers. This contract provides installation of security cameras 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 months. 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 both parties finalize contract negotiations, Jemison agrees to give Mirabella its old security equipment in exchange for a credit of $100,000. This old security equipment will not be decommissioned until the new equipment is operational. Mirabella estimates the fair value of the old equipment at the contract inception date to be $115,000. There is another provision in the contract that Jemison will receive a discount of $500,000 from the contract price of $10 million if they 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 probable, 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.

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 plus (500,000) 0%

Total 100%

Required: Analyze steps 1 through 5 of the revenue recognition standards, i.e., identify the contract, identify the performance obligations, and determine the transaction price. Then allocate the transaction price among performance obligations, and finally discuss how and when revenue should be recognized.

i need help with step 5, journal entries and how and when revenue is recognized (at one time or over a period of time). thank you.