Trehan, Inc. is an established manufacturer of equipment used in the railroad industry. All of Trehan’s sales prices include installation and training. The installation process does not involve changes to the features of the equipment and other companies could be hired to do the installation but most customers have Trehan do the installation. Similarly, other companies could be hired to do the training or customers can learn how to operate the equipment on their own but most have Trehan do the training for their employees. Trehan, Inc. has the following information regarding a sale to Metrarail: Metrarail enters into an agreement with Trehan Inc. on November 1, 2021. Metrarail is purchasing equipment item #201, training, and installation from Trehan for a price of $2,000,000. Metrarail selects the options to have Trehan to perform the installation and training. In addition, Metrarail will purchase a 2 year warranty for $60,000 for a total price of $2,060,000. The agreement specifies the following: Trehan will install equipment item #201 on or before December 1, 2021. Trehan will begin training to all necessary Metrarail employees within 48 hours of installation. Training will continue for one year after installation. The 2 year warranty will begin on December 1, 2021 and will expire on November 30, 2023. Metrarail will pay the Trehan, Inc. on January 2, 2024. Interest on comparable projects is equal to $120,000. The following bonus structure is also agreed to by both parties. Any time the equipment fails to work properly results in downtime for the railroad. In order to minimize the potential for equipment failure the following bonus structure is in place: Criteria Likelihood Incentive 0-5 equipment failures during first 6 months 70% $100,000 Bonus 6-10 equipment failures during first 6 months 15% $25,000 Bonus 11-15 equipment failures during first 6 months 10% $5,000 Bonus Greater than 15 equipment failures during first 6 months 5% $50,000 Penalty Trehan has significant experience in the industry and a revenue reversal is considered unlikely. Additional information is as follows: Standalone Pricing Equipment $1,836,000 Training $129,600 Installation $108,000 2 Year Warranty $86,400 Required: Apply the requirements of Revenue from Contracts with Customers to this case. Make sure you apply the detailed guidance/criteria for each of the 5 steps. Clearly label/explain all of your work and show any/all calculations.
Trehan, Inc. is an established manufacturer of equipment used in the railroad industry. All of Trehan’s sales prices include installation and training. The installation process does not involve changes to the features of the equipment and other companies could be hired to do the installation but most customers have Trehan do the installation. Similarly, other companies could be hired to do the training or customers can learn how to operate the equipment on their own but most have Trehan do the training for their employees.
Trehan, Inc. has the following information regarding a sale to Metrarail:
Metrarail enters into an agreement with Trehan Inc. on November 1, 2021. Metrarail is purchasing equipment item #201, training, and installation from Trehan for a price of $2,000,000. Metrarail selects the options to have Trehan to perform the installation and training. In addition, Metrarail will purchase a 2 year warranty for $60,000 for a total price of $2,060,000.
The agreement specifies the following:
-
Trehan will install equipment item #201 on or before December 1, 2021.
-
Trehan will begin training to all necessary Metrarail employees within 48 hours of installation. Training will continue for one year after installation.
-
The 2 year warranty will begin on December 1, 2021 and will expire on November 30, 2023.
-
Metrarail will pay the Trehan, Inc. on January 2, 2024. Interest on comparable projects is equal to $120,000.
The following bonus structure is also agreed to by both parties. Any time the equipment fails to work properly results in downtime for the railroad. In order to minimize the potential for equipment failure the following bonus structure is in place:
|
Criteria |
Likelihood |
Incentive |
|
0-5 equipment failures during first 6 months |
70% |
$100,000 Bonus |
|
6-10 equipment failures during first 6 months |
15% |
$25,000 Bonus |
|
11-15 equipment failures during first 6 months |
10% |
$5,000 Bonus |
|
Greater than 15 equipment failures during first 6 months |
5% |
$50,000 Penalty |
Trehan has significant experience in the industry and a revenue reversal is considered unlikely.
Additional information is as follows:
|
|
Standalone Pricing |
|
Equipment |
$1,836,000 |
|
Training |
$129,600 |
|
Installation |
$108,000 |
|
2 Year Warranty |
$86,400 |
Required:
Apply the requirements of Revenue from Contracts with Customers to this case. Make sure you apply the detailed guidance/criteria for each of the 5 steps.
-
Clearly label/explain all of your work and show any/all calculations.
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