Tool Time Inc. is an established manufacturer of equipment used in the construction industry. Tool Time Inc.’s products range from small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from € 600,000 to € 4,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Tool Time Inc. has the following arrangement with BuildStrong Company: - BuildStrong purchases equipment from Tool Time Inc. for a price of € 2,000,000 and chooses Tool Time Inc. to do the installation. Tool Time Inc. charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The installation service included in the arrangement is estimated to have a standalone selling price of € 20,000. - The standalone selling price of the training sessions is estimated at € 50,000. Other companies can also perform these training services. - BuildStrong is obligated to pay Tool Time Inc. the € 2,000,000 upon the delivery and installation of the equipment. - Tool Time Inc. delivers the equipment on September 1, 2019, and completes the installation of the equipment on November 1, 2019 (transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. a) What are the performance obligations for purposes of accounting for the sale of the equipment? b) If there is more than one performance obligation, how should the payment of € 2,000,000 be allocated to various components?
Tool Time Inc. is an established manufacturer of equipment used in the construction industry.
Tool Time Inc.’s products range from small to large individual pieces of automated machinery
to complex systems containing numerous components. Unit selling prices range from
€ 600,000 to € 4,000,000 and are quoted inclusive of installation and training. The installation
process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to
specifications. Tool Time Inc. has the following arrangement with BuildStrong Company:
- BuildStrong purchases equipment from Tool Time Inc. for a price of € 2,000,000 and
chooses Tool Time Inc. to do the installation. Tool Time Inc. charges the same price for the
equipment irrespective of whether it does the installation or not. (Some companies do the
installation themselves because they either prefer their own employees to do the work or
because of relationships with other customers.) The installation service included in the arrangement is estimated to have a standalone selling price of € 20,000.
- The standalone selling price of the training sessions is estimated at € 50,000. Other companies can also perform these training services.
- BuildStrong is obligated to pay Tool Time Inc. the € 2,000,000 upon the delivery and installation of the equipment.
- Tool Time Inc. delivers the equipment on September 1, 2019, and completes the installation of the equipment on November 1, 2019 (transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year. The
equipment has a useful life of 10 years.
a) What are the performance obligations for purposes of accounting for the sale of the equipment?
b) If there is more than one performance obligation, how should the payment of € 2,000,000 be allocated to various components?
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