Prepare journal entries for crane for revenue arrangement

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Question - Crane Company manufactures equipment. Crane's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $300,000 to $1,600,000, and are quoted inclusive of installation. The installation process does not involve changes to the features of the equipment to perform to specifications. Crane has the following arrangement with Winkerbean Inc.

  • Winkerbean purchases equipment from Crane for a price of $1,250,000 and contracts with Crane to install the equipment. Crane charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Crane determines that the installation service is estimated to have a fair value of $60,000. The cost of the equipment is $700,000.
  • Winkerbean is obligated to pay Crane the $1,250,000 upon delivery and installation of the equipment.

Crane delivers the equipment and completes the installation of the equipment on September 30, 2017. The equipment has a useful life of 10 years. Assume that the equipment and the installation are two distinct performance obligations that should be accounted for separately.

How should the transaction price of $1,250,000 be allocated among the service obligations?

Prepare the journal entries for Crane for this revenue arrangement in 2017, assuming Crane receives payment when installation is completed.

Reference no: EM132234984

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