Derby Transportation Inc. designs and builds trains for rail networks across Canada. The company, which is publicly traded, has an October 31 year end. On March 15, 2020, Derby Transportation signed a contract with OM Corridor Corp. to design and build 10 high-speed trains, with each train consisting of seven passenger cars. The high-speed train will operate between Ottawa and Montreal. The following events took place in 2020 in relation to the contract:

1. March 15: At the signing ceremony, officials from Derby and OM sign a contract, which is for $11 million. Derby is to design, manufacture, and deliver the 10 trains to OM’s train yards in Montreal. Derby’s management estimates that the design component of the contract would be valued at $2 million if contracted for separately, while the manufacturing of the ten trains would be valued at a total $10 million if they were purchased separately. Derby agreed to provide a two-year assurance-type warranty for the trains, and the company’s management estimates that the warranty claims would total $500,000 based on experience. OM agrees to pay a $5.1 million deposit within 14 days of signing the contract and to pay the balance within 45 days of the trains receiving final approval and certification from the Transportation Safety Board.

2. March 29: OM pays the deposit specified in the contract. 

3. May 9: Derby’s engineering staff complete the train design and it is approved by officials from OM as well as the Transportation Safety Board.

4. August 1: Derby completes construction of the 10 trains.

5. September 1: The 10 trains are delivered according to the contract to OM’s Montreal train yards.

6. September 30: After testing for safety compliance, the trains receive final approval from OM and the Transportation Safety Board and are certifi ed to carry passengers.

7. November 15: OM pays the balance owing on the contract.

Required

a. Using the five-step model for revenue recognition, determine when and how much revenue Derby would be able to recognize for the year ended October 31, 2020. Round percentages to nearest two decimal places.

b. Based on your analysis in part “a,” prepare all of the journal entries required by Derby in relation to the contract. If no journal entry is required, explain why that is the case.