Question

Terry determined early in its history that it was more effective for them to build their own specialized production equipment than for them to share their proprietary production data with a construction company. While this process leads to a larger upfront cost for new equipment, the special production methods used by the company have earned much more than the initial extra outlay. While the company has historically kept this production process in-house, they have recently been approached by a local university with a request to provide a set of machinery that the university can use to produce their own specialty bags. Since many members of Terry’s Board of Directors (and several large shareholders) are alumni of this university, Terry’s management has decided that they will go through with the sale of a three-machine system to the university. As part of the deal, Terry’s management has insisted that the university also purchase a 3-year maintenance contract (which will begin as soon as the last machine is installed). This requirement will allow Terry’s engineers and machinists to take care of the equipment, reducing the chance of losing their competitive advantage. The total contract price for the machines and the maintenance contract is$660,000. As part of the contract, both parties have agreed that the university will have the right to return the equipment if they are not satisfied with the performance of the machines. Terry will also provide an additional refund for the maintenance contract if the company returns the equipment within the next few years. While Terry has never sold its equipment before, machinery for making bags can be purchased from many other companies. In addition, many of those companies also provide service contracts to care for the machines they sell. Other versions of the machines typically sell for $165,000; $130,000; and$300,000. A 3-year maintenance contract sells, on average, for $72,000. By the end of Year 3, Terry had installed the first and second machines and the university has paid$293,000. Terry’s management team anticipates that the final machine will be installed in January of Year 4, and the maintenance contract will begin immediately after the final installation. The university will pay the balance of the contract once the last one is installed

Make sure that you include only the amount the client has paid! After rounding, if the sum of your percentages doesn't equal 100% (if it gives you 99% or 101%), then manually adjust the smallest percentage up or down so that you have a total of 100%Make the appropriate journal entries, if any, to account for the installation of the machines(including any necessary changes to income tax expense) and the first payment by the university. Assume that the first machine cost Terry $132,000, the second $117,000, and the third $210,000. The average cost of the maintenance contract is $22,000. Terry’s work building these machines has already been appropriately recorded in inventory.

Provide journal entries

What more do you need?

Answer 1

Terry have never sold the machines earlier and he has entered into single contract to sale Machine-1, Machine-2, Machine-3 & Maintenance Contract. Hence there are 4 deliverable in contracts for which fair value needs to be allocated to each contract.

We have market price available to equivalent to same deliverable which is used to derive the fair value of deliverable in contract :

Deliverable in Contracts	Market value of each deliverable	Fair value allocation of each deliverable
Machine-1	165,000	163,268
Machine-2	130,000	128,636
Machine-3	300,000	296,852
Maintenance Contract	72,000	71,244
Total	667,000	660,000

Now Let us pass different Journal Entries :

Sr. No.	Account	Debit	Credit
1	University A/c	291,904
	Revenue from Machine Sales		291,904
	(Being Revenue of machine-1 & Machine-2 on the base of fair value allocation recognised on installation of machines)
2	Cash A/c	293,000
	University Account		293,000
	(Being receipt of cash)
3	Cost of Machine Sold Account	249,000
	Inventory		249,000
	(Being issue of machine-1 & Machine-2 costing 132,000 & 117,000 respectively from inventory)

Hope this is helpful and do comment if you need any further information in this regard.