1 answer

Dig inventory and The follow Ch 7 and The test to help you id above the...

Question:

dig inventory and The follow Ch 7 and The test to help you id above the sample et 4. Handler Company is an experienced manufa

The followme sam I 7 to help you The same II. Long Term Contract (10 points) Astra Construction Company contracted to build a

dig inventory and The follow Ch 7 and The test to help you id above the sample et 4. Handler Company is an experienced manufacturer of equipment used in the construction industry. Handler's products range from small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from $600,000 to $4,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Handler has the following arrangement with Chai Company (1) Chai purchases equipment from Handler for a price of $2,000,000 and chooses Handler to do the installation. Handler charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The price of the installation service is estimated to have a fair value of $20,000 (2) The fair value of the training sessions is estimated at 550.000. Other companies can also perform these training services (3) Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment (4) Handler delivers the equipment on September 1, 2014, and completes the installation of the equipment on November 1, 2014 transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. Required: (a) What are the performance obligations for purposes of accounting for the sale of the equipment? (b) If there is more than one performance obligation, how should the payment of $2,000,000 be allocated to various components?
The followme sam I 7 to help you The same II. Long Term Contract (10 points) Astra Construction Company contracted to build an office building for $3.000.000. Construction began in 2003 and was completed in 2005. Data relating to the contract are summarized below 2005 1.400.000 Costs incurred during the year Estimated costs to complete as of 12/31 Billings during the year Cash collections during the year 2003 700.000 1.800.000 000.000 800.000 2004 980,000 1.400.000 1.100.000 1,200,000 1.000.000 1.000.000 What amount of income on the long term contract would Astra report in 2003, 2004 and 2005 if the firm uses the percentage of completion method of accounting for long term contracts? 2003 2004 2005 Income on Long Term Contract

Answers

Answer to 4(a)
Handlers main obligation is to sell the equipment. Other services such as installation and testing can be performed by other entities.
Hence installation and testing represents distinct performance obligations.
So to account for sale of equipment, delivery must be made and then revenue can be recognised
Answer to 4(b)
If there are more than one performance obligation then the allocation will be as follows-
Performance obligation Standalone price Percentage of total Transaction price Allocation amount
Delivery                           20,00,000 97%        20,00,000            19,32,367
Installation                                20,000 1%        20,00,000                  19,324
Training                                50,000 2%        20,00,000                  48,309
Total                           20,70,000            20,00,000
Answer to 11
Under percentage of completion method
Revenue to be recognised= (percentage of work completed)* Total contract value
Percentage of work completed= total expenses incurred/total estimated cost
2003 2004 2005
Total expenses incurred                             7,00,000        9,80,000        14,00,000
Total estimated cost                           18,00,000     14,00,000 -
Percentage of work completed 39% 70% 100%
Percentage of work completed each year 39% 31% 30%
Total Contract value 3000000 3000000 3000000
Income on long term contract                          11,70,000       9,30,000          9,00,000
.

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