a. Rory Inc. is a manufacturer of windows. Rory primarily sells to residential builders who take delivery of the windows only when the house is at the stage where the windows can be immediately installed. Consequently, builders will order the total number of windows in the various shapes and sizes needed for an entire season. The builder will be invoiced as the order is complete and the windows are put into a separate section of the ware-house and tagged with the customer name. But the windows will not be delivered until requested by the customer. The completed window order is held in Rory’s warehouse and shipped as the requests are received. Payment is made 60 days after the invoice date.
b. Heckinger Inc. manufactures customized equipment used in the paper packaging industry. Customers can pick from a variety of “sections” to build a customized piece of machinery. It takes about nine months to build these machines. However, even though the machines are “ customized,” they can be easily modified at any time during the production phase for another customer, since the sections are standard and easily disassembled if required. The contract outlines which standard sections will be required and how they will be assembled for the final machine, the amount of the consideration to be paid, and that the customer will take title on delivery and inspection of the machinery. Payment is due after delivery and inspection.
c. Nevo Corporation develops customized software for clients related to inventory management. Nevo starts with the customer specifications and then writes the software based on these requirements. It takes about 18 months to complete the project from concept and specifications through programming, debugging, and testing. Included in the contract are installation, on- site testing, training, and two years’ upgrade and service ( which commences after the training is complete). Customers make progress payments throughout the contract as certain milestones are achieved. A contract outlines the specifications for the software; a project plan for installation, testing, training, upgrades, and service; the mile-stones to be achieved; and the consideration to be paid. Nevo also sells ongoing upgrade and service agreements separately to customers, but installation, testing, and training are not offered separately, since these are customized to the specific customer’s software.

For each situation, assess the five steps, and determine when revenue is recognized and how costs and payments should be accounted for.

  • CreatedAugust 20, 2015
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