You inquired about why Teuvo would have agreed to make a sale at a loss. The companys controller indicated that the company felt the profit on Contract A was sufficient to justify selling at a loss on Contract B, and it viewed the two contracts, together, as sufficiently profitable. We normally get $85,000 for the goods in Contract A and $60,000 for the goods in Contract B, so we were happy with the transactions, but this is how the customer wanted to structure them.

Required:

1. Should the two contracts be combined for purposes of applying the 5-step revenue recognition model?
2. What amount of revenue should Teuvo associate with each of the contracts?
3. When should revenue be recognized on each of the contracts?