Dingleberry operates a chain of 300 convenience stores. Dingleberry wants to install automated frozen yogurt dispensing equipment in its stores. Customers would get premeasured amounts of yogurt after prepaying the cashier or swiping their credit cards and entering the amount of their purchases on a keypad. FroMacCo [FMC] develops and sells the necessary equipment for automated food dispensing and accounting. With modifications, FMC's equipment can be tailored for Dingleberry's business.

Dingleberry engages FMC to develop the dispensing and accounting equipment to meet its needs. Dingleberry agrees to pay FMC $1,700,000 to develop and install the equipment and train Dingleberry's staff.

FMC will also provide tech support for two years. The terms include a payment of $700,000 on contract signing [non-refundable] and $300,000 when training of Dingleberry staff is completed [one month before installation], and $700,000 when the system is installed.

FMC usually charges $1,500,000 for the equipment, $300,000 for training [which is not sold separately] and $700,000 for two years of tech support.

Question: Use the Accounting standard codification.

1. Explain how to allocate the contract price to the performance obligations.

2. Do that allocation.

3. Viewed from Dingleberry’s point of view:

a. Is this a startup activity? Explain.

b. How should Dingleberry account for the costs of this arrangement with FMC?

Answer rating: 100% (QA)

Solution 1 FMCs performance obligations are identified below Installation of equipment and system an... View the full answer