Agility Robotics develops and manufactures robots that are used for a variety of tasks including loading & unloading boxes in warehouses.

Agility recently signed a new customer, FedEx who bought 50 robots to use in one of their facilities. Agility has the robots in stock.

The contract includes the purchase of 50 actual robots plus implementation and support for 2 years. The entire price of the contract is $4,200,000.

Included in the $4,200,000 purchase price is the following:

(i) 50 robots. FedEx will take ownership of the robots

(ii) Implementing/configuring the robots for use in a specific FedEx facility. Agility estimates that it will take 2 months to configure and deploy the robots for use

(iii) Ongoing customer support for the life of the contract.

Here are some additional specifics:

The robots include hardware and software to run the robots. Once a robot is configured and deployed, it is expected that each robot has 46 months of life, on average, before it needs to be scraped or replaced.

The 2-year contract starts on Jan 1st, 2024, and will run for 24 months until December 31st, 2025

Agility estimates that if the 50 robots were sold on a stand-alone basis including software but without implementation/configuring and without ongoing customer support, the robots would sell for $3,400,000. The $3,400,000 includes both the hardware and software/updates for the robot.

Agility estimates that 80% of the value of the robot is the hardware and 20% of the value of the robot is software and ongoing updates to the software. For all its robots, Agility guarantees to provide ongoing software/updates for the life of the robot, assumed to be 46 months, even if the buyer of the robots is no longer under contract for ongoing customer support.

Agility estimates that the implementation/configuration would be worth $300,000 if sold separately.

Agility estimates that if the ongoing customer support was sold separately, it would be worth $900,000 over the life of the contract.

When deploying new robots, Agility estimates that it takes 2 months to configure and deploy the robots until they can be used, and assume that it will be 2 months for FedEx. Customer support does not start for a customer until after a successful deployment of the robots.

Timing of revenue recognition. o Revenue recognition for the hardware (the actual robots) occurs on the first day of the contract.

o Revenue recognition for the implementation/configuration occurs at the end of the 2nd months when the robots are fully deployed.

o Revenue recognition for the software occurs evenly over the 46 months of the expected useful life of the robot. The revenue recognition starts only once the robots are deployed.

o Revenue recognition for the customer support is pro-rated over the remaining life of the contract only once the robots are fully deployed.

2

1. How should the $4,200,000 contact price be allocated across the four elements of the contract. The allocation will occur across four components: (i) hardware, (ii) software, (iii) implementation/configuration, and (iv) customer support.

2. How much revenue will Agility recognize in each of the following months of the contract?

Month 1 (January 2024) ______________

Month 2 (February 2024) ______________

Month 3 (March 2024) ______________

Month 4 (April 2024) ______________

3. Once the 2-year contract ends on December 31st, 2025, Agility will still have some deferred revenue that it has yet to recognize. What will be the balance in the deferred revenue account for Agility on Jan 1st 2026 due to the sale of these 50 robots?

4. Under the terms of the contract, Agility can bill FedEx $2,800,000 immediately. It can bill another $1,000,000 once the 50 robots are deployed/implemented, and then it can bill the remaining amount of the contract 12 months into the contract on Jan 1st 2025. Assume that Agility sends initial bill to FedEx immediately on Jan 1st 2024. FedEx always takes 3 months to pay its bills from the date it is billed.

a. What is the journal entry (or entries) that Agility records on 1/1/2024 when it sends out the initial invoice for $2,800,000 and delivers the robots to FedEx? Ignore any entries relating to cost of good sold or inventory. Only record entries relating to the revenue (e.g., revenue, accounts receivable, etc...)

b. What is the journal entry (or entries) that Agility records on 2/28/24 once the robots are successfully deployed. Assume that Agility bills FedEx for the additional $1,000,000 once the robots are deployed. Again ignore any entries for cost of goods sold and inventory.

c. What is the journal entry (or entries) on 3/31/2024 at the end of the 3rd month of the contract. Assume that Agility collects the cash from FedEx from the first bill on this date.