Coconut Telegraph

Topics: Generally Accepted Accounting Principles, Contract, Accounts receivable Pages: 6 (1158 words) Published: May 17, 2015
James Huang
Professor Kunkel
November 9, 2014
Individual Case Study
1. Yes, the agreement on February 1, 2012 is within the scope of ASC 985-605. Example 9 in section 985-605, 55-180 is similar to the case. According to 985-605, 55-182, the revenue for PCS would be “deferred and recognized in income over the one-year post-contract customer support service period” assuming the “lack of vendor-specific objective evidence of the fair value of the delivered software element.” In reference to the example, the PCS should be accounted monthly over the 12-month period. There is no “vendor-specific objective” because the product and the service are not sold separately. 2. The items should be accounted separately. In example 4, section 605-10, 55-26, the company that sells the car with lifetime maintenance services has to account the two items separately because of the standalone value of the car and the lack of refund rights. Similar to the car and warranty example, the hardware for Volcano System has standalone value regardless of the functionality of it. Also, there is no right of return for the product and PCS. Therefore, they should be considered as “separate units of accounting in the arrangement. 3. Section 605-10, 25-1 includes “separately priced extended warranty and product maintenance contracts.” These warranty obligations are defined as “not separately priced or sold but are included in the sale of the product.” According to 605-10, 25-2, PCS should be “recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided.” With accrual accounting, revenue should be recognized on March 1, 2012 for Volcano system. At the end of the month, one-twelfth of the revenue would be recognized for PCS using straight line method. The rest of the revenue for PCS would be recognized every month as the service is being provided. 4. Assumption: Because total price for the system and the PCS would be $14,000 if they were to be sold separately, we have to find their proportion to the total price first before any calculation. Here’s the calculation to find their proportion: $12,000 / $14,000 = (easier for later calculations)

The above number is the proportion of the Volcano System in the total price. $2,000 / $ 14,000 = (easier for later calculations)
The above number is the proportion of the PCS in the total price. Now we have to find the actual price of the Volcano System and the PCS in proportion to the real price, which is shown below: Price of Volcano System:

$12,000 × = $10,285.71 (rounded to two decimals place)
We take the actual price of the total items and multiplies it by the proportion of the Volcano System to find the actual price of it. Price of PCS:
$12,000 × = $1,714.29 (rounded to two decimals place)
Same as the step above, we take the actual price of the total items and multiplies it by the proportion of the PCS to find its value. Now that we know the price, we can do the calculations.
a. February 1, 2012
Revenue accrued by SIC but have not been recognized:
Account Receivable$12,000.00
Unearned Revenue$12,000.00
b. February 28, 2012
Revenue for installation of the Volcano System is recognized at the end of February: Unearned Revenue$10,285.71
Revenue$10,285.71
c. March 31, 2012
Using straight line method, one month of revenue from PCS is recognized at the end of March: $1,714.29 × = $142.86
That’s how much the revenue should be recognized each month using straight line method. Here’s the revenue recognition at the end of March:
Unearned Revenue$142.86
Revenue$142.86
d. April 30, 2012
Second month of PCS; same revenue recognition as the first month for the PCS: Unearned Revenue$142.86
Revenue$142.86
e. May 31, 2012
First we have to find the values of training service and the PCS in proportion: $3,000 + $2,000 = $5,000
$3,000 / $5,000 =
The above value is the proportion for the training service in the second...
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