Reference no: EM131264498
Company A is a public company with a calendar year end. In its current year ending December 31, 2015, it began selling a new piece of equipment (Equipment X) to its customer base. Installation is required for this piece of equipment to function properly. Company A usually sells and performs the installation services related to Equipment X. However, some customers have hired other qualified technicians (not related to Company A) to install Equipment X using the owner’s manual that comes with Equipment X. When Company A sells just Equipment X to a customer (i.e., it does not also sell installation services to the customer), it charges the customer $10,000 for the equipment. There is sufficient evidence to support that $10,000 is the fair value of Equipment X. When Company A sells both Equipment X and the related installation services, it charges $10,000 for the equipment and $1,800 for the installation services. Company A does not offer customers that buy Equipment X (with or without installation services) the right to return the equipment. The inventory costs associated with Equipment X are $7,500. The costs Company A incurs to provide the installation services are $500. When a customer hires a qualified technician that is not related to Company A to perform the installation services (instead of hiring Company A to perform these services), the cost to the customer is $2,000. There is sufficient evidence to support that $2,000 is the fair value of the installation services. Customer B placed an order for Equipment X and the related installation services on December 20, 2015. Company A shipped Equipment X on December 25, 2014, and Customer B received the equipment on December 29, 2015. Company A performed the installation services on January 5, 2016. The total amount invoiced to Customer B is $11,800. Of that amount, $10,000 is invoiced to Customer B upon its receipt of the equipment on December 29, 2016, and $1,800 is invoiced to Customer B upon completion of the installation on January 5, 2016. Q: Should Company A treat Equipment X and the installation services separately for revenue recognition purposes or bundle them together as one unit of account for revenue recognition purposes? Explain the literature that enters into this assessment, the key facts considered in this assessment, and the basis for your conclusion.
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