Question

Tamarisk Company manufactures equipment. Tamarisk'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. Tamarisk has the following arrangement with Winkerbean Inc. Winkerbean purchases equipment from Tamarisk for a price of $940,000 and contracts with Tamarisk to install the equipment. Tamarisk charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Tamarisk determines installation service is estimated to have a standalone selling price of $49,000. The cost of the equipment is $600,000 Winkerbean is obligated to pay Tamarisk the $940.000 upon the delivery and installation of the equipment Tamarisk 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. (a) Your answer is incorrect How should the transaction price of $940,000 be allocated among the service obligations? (Do not round intermediate calculations. Round final answers to decimal places.)

Answer 1

The transaction price of $940,000 should be allocated between the equipment and the installation service based on the relative standalone selling price method. The equipment would have a standalone selling price of $891,000 and the installation service $49,000. Using these amounts, the respective portions of the total transaction price can be calculated and assigned accordingly.

Step-by-step explanation:

To determine how the transaction price of $940,000 should be allocated among the distinct performance obligations (i.e., the equipment and the installation service), we must assess the standalone selling price of each component. From the information provided, we know that the installation service has a standalone selling price of $49,000. The equipment, therefore, has a standalone selling price of $940,000 minus $49,000, which equals $891,000.

To allocate the transaction price, we use the relative standalone selling price method. The allocation is based on the proportion of each performance obligation's standalone selling price to the total of the standalone selling prices. The calculation is as follows:

• The proportion for the equipment = $891,000 / ($891,000 + $49,000)
• The proportion for the installation service = $49,000 / ($891,000 + $49,000)

Once we have these proportions, we can allocate the total transaction price:

• Equipment revenue recognized = $940,000 x (proportion for equipment)
• Installation service revenue recognized = $940,000 x (proportion for installation service)

It's important to note that actual calculations must be done without rounding intermediate values.

The revenue for each performance obligation is recognized when control of the goods or services is transferred to the customer, which for the equipment is on delivery (June 1, 2020), and for the installation service is upon completion (September 30, 2020).