Mirabella, Inc, sells security equipment, usually along with computer integration services. It has not sell these separately before. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors in the area could are not able to provide this highly customized computer integration services

The sales manager for Mirabella just obtained a signed contract from Jemison Brothers to provide and perform computer integration services for security equipment at a cost of $10 million, and to have everything operational within one vear, at which time full payment is due. Jemison will not get control of the equipment until the integration is completed. Management expects to have the system fully operational and available for Jemison's use in the 12 month of the contract.

To sweeten the deal, the sales manager offered to provide 5-year maintenance service for free, which typically sells for $300,000 In the initial contract negotiation stage, the contract price with Jemison was $10.1 million in cash. However, as part of the final contract negotiations. Jemison agrees to give Mirabella its old security equipment in exchange for a credit of $100,000. It is expected that this old security equipment will not be decommissioned until the new equipment is operational. Based on its extensive experience, Mirabella believes it is probable that the estimated fair value of the old equipment at the contract inception date is $115,000. There is a 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 is completed early and Mirabella agreed to pay a penalty if the integration is completed late. 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 46 %

13 months (50,000) 7 %

14 months (100,000) 3 %

15 months plus (500,000) 0%

Jemison Brothers have a great credit rating and always pays its bills.

Mirabella s sales manager is very pleased because he is supposed to receive a 2% bonus based on the $10 million (after credit for equipment) contract price, payable upon receipt of a signed contract. Additional costs related to acquiring the contract include the costs of the marketing group which supports the sales manager. The total annual salaries for the marketing group are $400,000. On average, the marketing group works on 20 proposals each year. This contract is expected to have a 15% to 20% margin.

Make a memo and should be based on the assumption that the contract will be executed as described below. Cite the Codification Guidance

Mirabella is concerned if its contract will satisfy all of the conditions of the first criteria of revenue recognition related to a contract.

The client is uncertain if there is one or more "performance obligations" which they understand will affect the timing of revenue recognition.

The company is uncertain about when and how to record the sales manager's bonus and the other related marketing costs.

The client wants guidance as to the implications for its income statement and balance sheet upon the receipt of the signed contract from Jemison Brothers.

Specifically, the clients want to understand the impact on revenue and expenses and assets and liabilities, assuming Jemison Brothers takes the $500,000 discount by paying $9.5 million within 3 days of signing.