Talkington Company manufactures equipment. 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. Talkington has the following arrangement with Henderson Inc.

• Henderson purchases equipment from Talkington for a price of $1,200,000 and contracts with Talkington to install the equipment. Talkington charges the same price for the equipment irrespective of whether it does the installation or not. Using market data, Talkington determines installation service is estimated to have a fair value of $50,000. The cost of the equipment is $750,000.

• Henderson is obligated to pay Talkington the $1,200,000 upon the delivery and installation of the equipment.

Talkington delivers the equipment on June 1, 2017, 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.

(1) How should the transaction price of $1,200,000 be allocated among the service obligations?

(2) Prepare the journal entries for Talkington in 2017.

(3) Assuming Talkington 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 $32,000; Talkington prices these services with a 25% margin relative to cost. How much revenue will be allocated to the installation service? Please show your calculation.

Answer rating: 100% (QA)

Answer Explanation 1 Fair value of the equipment 1200000 Fair value of the installation fe... View the full answer