Problem $1(4$ Points$)$

Trusty Tire Store sells and aligns sets of tires for automobile owners. Customers may purchase a set of tires from Trusty and have them installed elsewhere, purchase tires elsewhere and have them installed by Trusty, or purchase tires from Trusty and have them installed by Trusty.

Trusty charges $ $800$ for a standard set of tires, and charges $ $200$ to install a set of tires. However, a customer that purchases tires from Trusty, and has those tires installed by Trusty, pays a total amount of $ $900.$ Customers may cancel a tire purchase within $30$ days of placing an order, but once tires have been installed $($either by Trusty Tire or by some other dealer$),$ there is no longer a $$right of return$.$

On December $30,2018,$ Joe Flat dropped off his car at Trusty Tire Store. Joe signed a contract to purchase a set of tires, and have them installed by Trusty Tire Store. He mentioned that he planned on picking up his car on January $3$rd$,$ after he returned from vacation. Joe paid $ $450$ of cash to Trusty Tire Store on December $30,2018,$ and he indicated that he would pay the remaining $ $450$ owed when he picked up the car on January $3$rd$.$ You may assume that there is no uncertainty regarding Joe$$s ability to pay.

On December $31,2018,$ Trusty Tire Store went to their warehouse and picked up the set of tires that would be installed on Joe$$s car. The staff at Trusty Tire installed the tires on January $2,2019$ Joe picked up his car on January $3,$ and paid the amount due.

For this problem, assume that Accounting Standards Update $2014-09,$ Revenue

Recognition from Contracts with Customers, is in effect.

Based on the information provided above, please answer the following questions:

A$.(1)$ What are the distinct $$performance obligation$($s$)$ that Trusty Tire Stores must

satisfy in order to fulfill their contract with Joe Flat?

A$.$ One could certainly make the claim that Trusty Tire Shop has two performance

obligations $$ providing tires and installing tires. However, in this contract, the two

performance obligations are NOT $$distinct$,$ as the sale of tires is interrelated with the

installation of tires. Thus, there is only one distinct performance obligation, the $$sale

and installation of tires$.$

B$.(1)$ Assume that, as of December $31,2018,$ Trusty Tire Store assumed that it was NOT

probable that Joe Flat would call and cancel his tire order. Based on your answer to

Part A$,$ how much revenue, if any, may Trusty Tire Store record during their fiscal

year ending December $31,2018$ related to the contract with Joe Flat?

B$.$ Based on the answer to Part A$,$ Trusty Tire Shop would record $ $0$ revenue as of

December $31,2018,$ as the distinct performance obligation had not yet been fulfilled.

C$.(1)$ Assume that on December $31,2018,$ Trusty Tire Store picked up a set of tires from

their warehouse, and installed the tires on that same date. Based on your answer to

Part A$,$ how much revenue, if any, may Trusty Tire Store record during their fiscal

year ending December $31,2018$ related to the contract with Joe Flat?

C$.$ In this scenario, the distinct performance obligation would be satisfied as of Dec. $31,$

$2018.$ Accordingly, Trusty Tire Shop could recognize $ $900$ of revenue during the

year ending December $31,2018($this presumes that one does not consider $$storage of

Joe Flat$$s car$$ for a few days as a performance obligation$).$

D$.(1)$ Would your answer to any of the above questions change if the contract indicated

that Trusty Tire Company would charge Joe Flat a fee of $ $10$ per day if Joe Flat

failed to pick up his car on January $3$rd$?$ If so$,$ which Part$($s$)$ would change, and in

what way?

D$.$ In this case, the $$storage$$ of the car subsequent to January $3$rd may be considered a

$$distinct$$ performance obligation $-$ Joe Flat might benefit from storing the car at the

dealership, and this benefit would not be related to the sale$/$installation of the tires

$($i$.$e$.$ Joe Flat might want to$,$ and would possibly be willing to pay, to store his car at

some location even if new tires were not installed on the car$).$

Accordingly, Answer A would change. However, neither Answer B nor

Answer C would change, as the performance obligation for storing Joe$$s car beyond

January $3$rd is independent of the sale$/$installation of the tires.