Part II:

Part I should be completed before beginning Part II.

Background:

In the initial contract negotiation stage, the contract price with SM was $10.1 million in cash. However, as part of the final contract negotiations, SM agreed to give EYE SPY its old surveillance equipment in exchange for a credit of $100,000. It is expected that this old surveillance equipment will not be decommissioned until the new equipment is operational. Based on its extensive experience, EYE SPYs management believes it is probable that the estimated fair value of the old equipment at the contract inception date is $115,000.

Due to deep security concerns and recent losses of proprietary information, SM also offered a bonus to EYE SPY if the integration was completed early and EYE SPY agreed to pay a penalty if the integration was completed late. EYE SPY has a large number of contracts with bonus characteristics similar to the contract with SM. The following is the schedule of the potential bonus or penalty. While no specific outcome is probable, EYE SPYs management assessment of the likelihood of completing the integration in the specified time frame is based on significant historical experience with similar integration jobs.

Completed	Bonus	Penalty	Percentage
10 months	$100,000		17%
11 months	50,000		27%
12 months	0	$ 0	46%
13 months		(50,000)	7%
14 months		(100,000)	3%
15 months plus		(500,000)	0%
Total			100%

Requirements:

Review ASC 606-10-32-2 through 21.

Perform step three of the revenue recognition model and determine the transaction price. Provide a detailed analysis to support your conclusion.

Record any required journal entries for the first two days of the contract beyond what was recorded in Part I. Prepare any required updated T accounts.