EYE SPY sells the video surveillance equipment and computer integration services
ID: 2573638 • Letter: E
Question
EYE SPY sells the video surveillance equipment and computer integration services together. It does not sell these separately. EYE SPY typically sells this type of video surveillance equipment and integration services with a forecasted cost of $8.136 million for $9.85 million. EYE SPY has just begun selling maintenance services and has forecasted the cost of these services at $164,000.
In the initial contract negotiations, EYE SPY told SM they would be asking for $300,000 related to the five-year maintenance contract. SM informed EYE SPY 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.
Requirement:
3.1 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.
Explanation / Answer
EYE SPY sells the video surveillance equipment and computer integration services together. It does not sell these separately.
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.
Video surveillance equipment and integration services with a forecasted cost = $8.136 million
Maintenance services has forecasted the cost = $164,000
Total Contract transaction price = $9.85 mn + $ 0.2 mn = $ 1.05 mn
Allocation of price to performance obligations :-
The transaction price need to be splited into different performance obligations. i.e,
1) video surveillance equipment
2) integration services
3) maintenance services
The best way to split it is on the bases of standalone selling price of these product and services.
And the standalone selling price can be identified by taking the observable prices available in the market for the similar product and services.
In case where the standalone prices are not available then in this case we can use the different approches :
Here in this case, we can allocate the transaction price on the bases of expected cost only.
video surveillance equipment and integration services has forecasted cost = $8.136 million
maintenance services has forecasted cost of = 164,000
Total forecasted cost = $ 8.3 mn
Thus ,
Revenue for video surveillance equipment and integration services = $ 1.05 * $8.136/ $ 8.3 = $ 1.0293 mn
Revenue for maintenance service = $ 1.05 * $ 0.164/ $ 8.3 = $ 0.0207 mn
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