278 SECTION 1 The Role of Accounting as an Information System Estate Construction is constructing a building for CyberB, an online retailing company. Under the construction agreement, if for any reason Estate can’t complete construction, CyberB would own the partially completed building and could hire another construction company to complete the job. When should Estate recognize revenue: as the building is constructed, or after construction is completed? On May 1, 2016,Varga Tech Services signed a $6,000 consulting contract with Shaffer Holdings. The contract requires Varga to provide computer technology support services whenever requested over the period from May 1, 2016, to April 30, 2017, with Shaffer paying the entire $6,000 on May 1, 2016. How much revenue should Varga recognize in 2016? Sarjit Systems sold software to a customer for $80,000. As part of the contract, Sarjit promises to provide “free” technical support over the next six months. Sarjit sells the same software without technical support for $70,000 and a stand-alone six-month technical support contract for $30,000, so these products would sell for $100,000 if sold separately. Prepare Sarjit’s journal entry to record the sale of the software. eLean is an online fitness community, offering access to workout routines, nutrition advice, and eLean coaches. Customers pay a $50 fee to become registered on the website, and then pay $5 per month for access to all eLean services. How many performance obligations exist in the implied contract when a customer registers for the services? Vroom Vacuums sells the Tornado vacuum cleaner. Each Tornado has a one-year warranty that covers any product defects. When customers purchase a Tornado, they also have the option to purchase an extended three-year warranty that covers any breakage or maintenance. The extended warranty sells for the same amount regardless of whether it is purchased at the same time as the Tornado or at some other time. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? Assume the same facts as in BE 5–6 but that customers pay 20% less for the extended warranty if they buy it at the same time they buy a Tornado. How many performance obligations exist in the implied contract for the purchase of a vacuum cleaner? McAfee sells a subscription to its anti-virus software along with a subscription renewal option that allows renewal at half the prevailing price for a new subscription. How many performance obligations exist in this contract? Precision Equipment, Inc., specializes in designing and installing customized manufacturing equipment. On February 1, 2016, it signs a contract to design a fully automated wristwatch assembly line for $2 million, which will be settled in cash upon completion of construction. Precision Equipment will install the equipment on the client’s property, furnish it with a customized software package that is integral to operations, and provide consulting services that integrate the equipment with Precision’s other assembly lines. How many performance obligations exist in this contract? On January 1, 2016, Lego Construction Company signed a contract to build a custom garage for a customer and received $10,000 in advance for the job. The new garage will be built on the customer’s land. To complete this project, Lego must first build a concrete floor, construct wooden pillars and walls, and finally install a roof. Lego normally charges stand-alone prices of $3,000, $4,000, and $5,000, respectively, for each of these three smaller tasks if done separately. How many performance obligations exist in this contract? Aria Perfume, Inc., sold 3,210 boxes of white musk soap during January of 2016 at the price of $90 per box. The company offers a full refund for any product returned within 30 days from the date of purchase. Based on historical experience, Aria expects that 3% of sales will be returned. How many performance obligations are there in each sale of a box of soap? How much revenue should Aria recognize in January? BE 5–2 Timing of revenue recognition ● LO5–3 BE 5–3 Timing of revenue recognition ● LO5–3 BE 5–4 Allocating the transaction price ● LO5–4 BE 5–5 Performance obligations; prepayments ● LO5–5 BE 5–6 Performance obligations; warranties ● LO5–5 BE 5–7 Performance obligations; warranties ● LO5–5 BE 5–8 Performance obligations; options ● LO5–5 BE 5–9 Performance obligations; construction ● LO5–5 BE 5–10 Performance obligations; construction ● LO5–5 BE 5–11 Performance obligations; right of return ● LO5–5, LO5–6
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