Question

Vaughn Company manufactures equipment. Vaughn’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. Vaughn has the following arrangement with Winkerbean Inc.

Winkerbean purchases equipment from Vaughn for a price of $920,000 and contracts with Vaughn to install the equipment. Vaughn charges the same price for the equipment irrespective of whether it does the installation or not. The cost of the equipment is $644,000.
Winkerbean is obligated to pay Vaughn the $920,000 upon the delivery and installation of the equipment. Vaughn 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 Vaughn 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 $35,700; Vaughn prices these services with a 30% margin relative to cost.
How should the transaction price of $920,000 be allocated among the service obligations?
Equipment $
Installation $

Answer 1

Answer: See explanation

Step-by-step explanation:

The transaction price of $920,000 should be allocated among the service obligations as thus:

For Equipment:

= Fair value of equipment / Total fair value × Transaction price

= (920000 / (920000 + 276000) × 920000

= (920000 / 1196000) × 920000

= $707692

Installation:

= Fair value of installation / Total fair value × Transaction price

= 276000 / (920000 + 276000) × 920000

= (276000 / 1196000) × 920000

= $212308