Question

Metlock Company manufactures equipment. Metlock’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $200,000 to $1,500,000 and are quoted inclusive of installation. 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. Metlock has the following arrangement with Winkerbean Inc. ● Winkerbean purchases equipment from Metlock for a price of $1,070,000 and contracts with Metlock to install the equipment. Metlock charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Metlock determines installation service is estimated to have a standalone selling price of $46,200. The cost of the equipment is $599,000. ● Winkerbean is obligated to pay Metlock the $1,070,000 upon the delivery and installation of the equipment. Metlock delivers the equipment on June 1, 2017, and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations which should be accounted for separately. Assuming Metlock does not have market data with which to determine the standalone selling price of the installation services. As a result, an expected cost plus margin approach is used. The cost of installation is $33,200; Metlock prices these services with a 20% margin relative to cost.

(a) How should the transaction price of $1,070,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to 0 decimal places.) Equipment $ Installation $ Prepare the journal entries for Metlock for this revenue arrangement on June 1, 2017, assuming Metlock receives payment when installation is completed. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit (To record sales) (To record cost of goods sold) (To record service revenue) (To record payment received)

Answer 1

Sol.	The transaction price of $1,070,000 should be allocated on the basis of relative fair values.
	Here, The fair value of equipment should be considered $1,070,000 & fair value of installation service fee should be $46,200
	So the total fair value is = $1,070,000 + $46,200 = $1,116,200
	The allocation is as follows ;-
	Equipment :- ($1,070,000 / $1,116,200) * $1,070,000 = $1,025,712.238 = $1,025,712 (rouded off)
	Installation :- ($46,200/$1,116,200) * $1,070,000 = $44,287.76 = $44,288 (rouded off)
	Journal Entries :-
		Debit	Credit
	Cash	$1,070,000.00
	Service revenue - Installation		$44,288.00
	Sales revenue		$1,025,712.00
	(To Record sales)
	Cost of goods sold	$599,000.00
	Inventory		$599,000.00
	(To record cost of goods sold)
	Winkerbean	$33,200.00
	Service revenue		$33,200.00
	(To record service revenue)
	Cash	$1,070,000.00
	Winkerbean		$1,070,000.00
	(To record Cash received)