Crankshaft Company manufactures equipment. Crankshaft’s products range from simp
ID: 2467810 • Letter: C
Question
Crankshaft Company manufactures equipment. Crankshaft’s products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $216,000 to $1,620,000 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. Crankshaft has the following arrangement with Winkerbean Inc. Winkerbean purchases equipment from Crankshaft for a price of $1,080,000 and contracts with Crankshaft to install the equipment. Crankshaft charges the same price for the equipment irrespective of whether it does the installation or not. The cost of the equipment is $648,000. Winkerbean is obligated to pay Crankshaft the $1,080,000 upon the delivery and installation of the equipment. Crankshaft delivers the equipment on June 1, 2014, and completes the installation of the equipment on September 30, 2014. 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) How should the transaction price of $1,080,000 be allocated among the service obligations 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 $38,880; Crankshaft prices these services with a 25% margin relative to cost. (Round answers to 0 decimal places, e.g. 1,275.)
Equipment $ ________ Installation $ ________
(b) Crankshaft makes the following journal entries for September 30, 2014:
Cash........................................................................ xxxxx
Service Revenue (Installation).................................... xxxxx
Sales Revenue (Equipment)........................................ xxxxx
Cost of Goods Sold.................................................. xxxxx
Inventory........................................................................ xxxxx
Explanation / Answer
a Comparing the value share for equipment & installation with 25% margin assumption Cost 25% margin Total Value % wt of value Installation cost 38,880 9,720 48,600 5.66% Equipment 648,000 162,000 810,000 94.34% Total 858,600 Contract Price 1,080,000 Share of Equipment @94.34% 1,018,868 Share of Instaalation@5.66% 61,132 b Journal Entry on Sep 30,2014. Account Title Dr $ Cr $ Cash 1,080,000 Service Revenue (installation) 61,132 Sales Revenue (Equipment) 1,018,868 Cost Of Goods Sold 648,000 Inventory 648,000