Soorya Enterprises sells a corporate monitoring system that includes the hardware, software, and monitoring services and annual maintenance for three years for a fixed price of $750,000. The new controller would like to understand the accounting for this transaction under both the contract-based approach and the earnings approach.
Instructions
(a) Explain the principles for recognizing revenues under the earnings and contract-based approaches. Be sure to focus on the areas of difference between the two approaches.
(b) Explain the impact of collection and measurement uncertainty for revenue recognition under the earnings and contract-based approaches.
(c) Explain how this transaction should be accounted for under the earnings and contract-based approaches.
(d) Calculate how much revenue would be recorded under the following independent assumptions, rounding any percentages to two decimal places.
1. The fair values of the items are known and are as follows:
Hardware and software are approximately $650,000; monitoring services are $ 150,000 for the three-year period; and the maintenance is $75,000 for the three-year period.
2. The fair value of hardware and software is not determinable but the fair value of the monitoring services is $150,000 for the three-year period and the fair value of the maintenance is $75,000 for the three-year period.
3. The fair value of the hardware and software is approximately $650,000, but the fair value of the monitoring and annual maintenance cannot be established.
4. Soorya offers a delayed payment program under which payments may be made over the three-year service period of the contract.
(e) From the perspective of a potential investor in Soorya, consider the recognition of revenue in scenario 2 of part (d) above. Soorya estimates that for the three-year period, the fair value of the monitoring services is $100,000 and the fair value of the maintenance is $50,000. Meanwhile, its competitors are offering similar services valued at $ 150,000 and $75,000, respectively. What would be the impact of the company's revenue recognition policy on your decision to invest in the company?