On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with

Question

On July 15, 2016, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $96,000. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing sytem to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods and services separately, it would charge $65,000 for the scales, $10,000 for the software, and $25,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2016, and the calibration service commenced on that date. Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2016 for this contract?

Explanation / Answer

As per Accounting Standard-9 “Revenue Recognition” Revenue from service transactions is usually recognized as the service is performed, either by the proportionate completion method or by the completed service contract method.


(i) Proportionate completion method—Performance consists of the execution of more than one act. Revenue is recognized proportionately by reference to the performance of each act. The
revenue recognized under this method would be determined on the basis of contract value, associated costs, number of acts or other suitable basis. For practical purposes, when services are
provided by an indeterminate number of acts over a specific period of time, revenue is recognized on a straight line basis over the specific period unless there is evidence that some other method better represents the pattern of performance.


(ii) Completed service contract method—Performance consists of the execution of a single act. Services are performed in more than a single act, and the services yet to be performed are so significant in relation to the transaction taken as a whole that performance cannot be deemed to have been completed until the execution of those acts. The completed service contract method is relevant to these patterns of performance and accordingly revenue is recognised when the sole or final act takes place and the service becomes chargeable.

In case Ortiz’s and company may revenue recognize $75000(i.e.$65000+$10000) on accrual basis, service rendered by Ortiz’s company and $25000 will not be recognized at this period , because this service for calibration contract not rendered until the closing of the books of account .

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.