Question

Question: (Allocate Transaction Price) Refer to the revenue arrangement in E18-13.

Instructions

Repeat requirements (a) and (b) assuming Crankshaft 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 $36,000; Crankshaft prices these services with a 25% margin relative to cost.

Short answer

Answer

1. Allocated service obligation: Equipment:$956,938; installment: $43,062.

Both sides of the journal total$2,643,062

Step-by-step solution

Definition of Unearned Revenue

Unearned revenue can be defined as the liability that a business entity records for the revenue received in advance. The business entity adjusts this liability when the service or product for the advance revenue is provided.

Allocation of transaction price among service obligations

A service obligation of $1,000,000 needs to be allocated.

$$\begin{gathered} \mathbf{\text{Allocationtoequipment=}}\frac{\mathbf{S}\mathbf{t}\mathbf{a}\mathbf{n}\mathbf{d}\mathbf{a}\mathbf{l}\mathbf{o}\mathbf{n}\mathbf{e}\mathbf{}\mathbf{s}\mathbf{e}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}\mathbf{}\mathbf{o}\mathbf{f}\mathbf{}\mathbf{e}\mathbf{q}\mathbf{u}\mathbf{i}\mathbf{p}\mathbf{m}\mathbf{e}\mathbf{n}\mathbf{t}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{s}\mathbf{e}\mathbf{l}\mathbf{l}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{}\mathbf{p}\mathbf{r}\mathbf{i}\mathbf{c}\mathbf{e}}\mathbf{\times }\mathit{S}\mathit{e}\mathit{r}\mathit{v}\mathit{i}\mathit{c}\mathit{e}\mathbf{}\mathit{o}\mathit{b}\mathit{l}\mathit{i}\mathit{g}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{045}\mathbf{,}\mathbf{000}}\mathbf{\times }\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{956}\mathbf{,}\mathbf{938} \\ \mathbf{\text{Allocationtoinstallment=}}\frac{{\displaystyle \mathbf{Standalone}\mathbf{}\mathbf{selling}\mathbf{}\mathbf{price}\mathbf{}\mathbf{of}\mathbf{}\mathbf{equipment}}}{{\displaystyle \mathbf{Total}\mathbf{}\mathbf{selling}\mathbf{}\mathbf{price}}}\mathbf{\times }\mathit{S}\mathit{e}\mathit{r}\mathit{v}\mathit{i}\mathit{c}\mathit{e}\mathbf{}\mathit{o}\mathit{b}\mathit{l}\mathit{i}\mathit{g}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{{\displaystyle \mathbf{\$}\mathbf{45}\mathbf{,}\mathbf{000}}}{{\displaystyle \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{045}\mathbf{,}\mathbf{000}}}\mathbf{\times }\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{000}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{43}\mathbf{,}\mathbf{062} \end{gathered}$$

Working note:

The standalone selling price of Equipment is $1,000,000.

The standalone selling price of the installation is:

Particular	Amount $
Add: installation	36,000
Add: Profit margin on installation @25% of $36,000	9,000
Standalone selling price of installation	$45,000

Calculation of selling price:

Particular	Amount $
Selling price	$1,000,000
Add: installation	36,000
Add: Profit margin on installation @25% of $36,000	9,000
Total selling price	$1,045,000

Journal entries for revenue arrangement on 1 June 2017

Date	Accounts and Explanation	Debit ($)	Credit ($)
1 June 2017	Accounts receivable	1,000,000
	Unearned service revenue for installation		43,062
	Sales revenue (Equipment)		956,938
1 June 2017	Cost of goods sold	600,000
	Inventory		600,000
30 Sep 2017	Unearned service revenue	43,062
	Service revenue		43,062
30 Sep 2017	Cash	1,000,000
	Accounts receivable		1,000,000
		$2,643,062	$2,643,062