SEE YOU sells sophisticated video surveillance equipment. SEE YOU sells the equipment and computer
integration services together. It does not sell these separately. The equipment cannot operate without being fully
integrated with a computer system. Significant customization is required during this integration. Other competitors
could theoretically provide computer integration services. Historically, SEE YOU has not sold maintenance
services.
The sales manager for SEE YOU has just obtained a signed contract from Secret Manufacturing (SM) to provide
and perform computer integration services for surveillance equipment at a cost of $10 million, and have
everything operational within one year, at which time full payment is due. SM will not get control of the video
surveillance equipment until the integration is completed and SEE YOU turns control of the system over to SM.
Management expects to be able to have the system fully operational and available for use by SM in the 12 th
month of the contract.
SEE YOU believes this system would also be valuable to SM's competitors. The contract price of $10 million
includes a five-year maintenance agreement that will commence after the installation is completed. SM has a
great credit rating and always pays its bills. SEE YOU's sales manager is very pleased because he will receive a
2% bonus based on the gross sales contract price, and it is payable upon receipt of a signed contract.
SEE YOU maintains a marketing group to work on contract proposals. 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.
Requirements:
• Review ASC 606-10-25-1. Perform step one of the revenue recognition model and identify the contract(s)
with the customer. By reference to the applicable accounting literature, provide a detailed analysis to
support your conclusion.
• Review ASC 606-10-25-14 through 21. Perform step two of the revenue recognition model and identify
the performance obligation(s) in the contract(s). By reference to the applicable accounting literature,
provide a detailed analysis to support your conclusion.
• Review ASC 340-40-25-1 through 3 on deferring costs. Record any required journal entries as of the
date of receiving the signed contract. Prepare any required "T" accounts.

 
In the initial contract negotiation stage, the contract price with SM was $10.1 million in cash. However, as part of
the final contract negotiations, SM agreed to give SEE YOU its old surveillance equipment in exchange for a
credit of $100,000. It is expected that this old surveillance equipment will not be decommissioned until the new
equipment is operational. Based on its extensive experience, SEE YOU's management believes it is probable
that the estimated fair value of the old equipment at the contract inception date is $115,000.
There was also a provision in the contract that SM would receive a discount (similar to that which, would be
reflected in a separate financing transaction between SEE YOU and SM) from the contract price of $10 million if
they paid within three days of when the contract was signed. SEE YOU determined a discount of $500,000 for
this financing based on applying the typical credit rate for the equipment and integration services to be delivered
at the end of year one and the monthly delivery of maintenance services in year two through six of the contract.
SM wired $9.5 million to SEE YOU two days after the contract was signed. In the interest of full and expanded
disclosure, SEE YOU has decided not to apply the practical expedient in ASC 606-10-32-18.
Due to deep security concerns and recent losses of proprietary information, SM also offered a bonus to SEE
YOU if the integration was completed early and SEE YOU agreed to pay a penalty if the integration was
completed late. SEE YOU has a large number of contracts with bonus characteristics similar to the contract with
SM. The following is the schedule of the potential bonus or penalty. While no specific outcome is probable, SEE
YOU'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:
• Review ASC 606-10-32-2 through 21.
• Perform step three of the revenue recognition model and determine the transaction price. By
reference to the applicable accounting literature, provide a detailed analysis to support your
conclusion.
• Record any required journal entries for the first two days of the contract beyond what was recorded
in Part I. Prepare any required updated "T" accounts.

 

 

As stated in Part I, SEE YOU sells the video surveillance equipment and computer integration services
together. It does not sell these separately. SEE YOU typically sells this type of video surveillance
equipment and integration services with a forecasted cost of $8.136 million for $9.85 million. SEE YOU has
just begun selling maintenance services and has forecasted the cost of these services at $164,000.
In the initial contract negotiations, SEE YOU told SM they would be asking for $300,000 related to the five-
year maintenance contract. SM informed SEE YOU that several competitors were offering attractive pricing
to obtain this maintenance work. In order get the maintenance work, the draft contract was revised to
reflect that the maintenance services would be offered at a cost of $200,000.
Requirements
• Review ASC 606-10-32-28 through 41.
• Perform step four of the revenue recognition model and allocate the transaction price to each
separate performance obligation. By reference to the applicable accounting literature, provide a
detailed analysis to support your conclusion.

 
At the end of 11 months, the system is fully operational. The system has been tested and accepted by SM.
The old surveillance equipment was decommissioned when the new system was installed. The old
equipment was shipped to SEE YOU in month 11. The old surveillance equipment was sold the next month
for $120,000. For the sake of simplicity, no financing component needs to be allocated to the maintenance
contract.
Requirements:
• Review ASC 606-25-27 through 30; ASC 606-10-32-14, 42 and 43; and also ASC 606-55-248-250.
• Perform step five of the revenue recognition model and recognized revenue as performance
obligations are satisfied. By reference to the applicable accounting literature, provide a detailed
analysis to support your conclusion.
• Record any required journal entries for revenue, deferred costs, etc., through the 11th and 12th
months of the contract. Prepare any required, updated "T" accounts.
• Note: While some journal entries may have been recorded monthly, for purposes of this case,
show the cumulative journal entry recorded through the 11th and 12th months. Show all
calculations.

 

Answer rating: 100% (QA)

lets go through each part of the revenue recognition project with full details and solutions for all questions Part I Step 1 Identify the contract The contract between SEE YOU and Secret Manufacturing ... View the full answer