FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
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Pronghorn Company manufactures equipment. Pronghorn’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. Pronghorn has the following arrangement with Winkerbean Inc.
| ● | Winkerbean purchases equipment from Pronghorn for a price of $1,070,000 and contracts with Pronghorn to install the equipment. Pronghorn charges the same price for the equipment irrespective of whether it does the installation or not. The cost of the equipment is $599,000. | |
| ● | Winkerbean is obligated to pay Pronghorn the $1,070,000 upon the delivery and installation of the equipment. |
Pronghorn delivers the equipment on June 1, 2020, and completes the installation of the equipment on September 30, 2020. 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 Pronghorn 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; Pronghorn prices these services with a 20% margin relative to cost.
Please help
Transcribed Image Text:**Allocating the Transaction Price Among Service Obligations**
To determine how the transaction price of $1,070,000 should be allocated among the service obligations, please observe the following breakdown:
- **Equipment**: $1,030,160
- **Installation**: $39,840
*Note: Do not round intermediate calculations. Round final answers to 0 decimal places.*
This allocation reflects the proportion of the total transaction dedicated to equipment versus installation services.
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