1. Identify the performance obligations in the contract — January 2017 enters into with Drewry Corp build new piece equipment price

On January 2, 2017, TI enters into a contract with Drewry Corp. to build a new piece of equipment. The contract price is $ 3 million, and construction is expected to take 18 months. Drewry is billed and pays $ 1,500,000 of the contract price on January 2, 2017, and will pay the balance at completion. TI estimates that the cost of construction will be $ 2.2 million. Drewry includes two performance bonuses in the contact:

• U. S. Bonus: If the equipment design receives a U. S. patent by March 15, 2018, Drewry will pay a $ 300,000 bonus.

• International Bonus: If the equipment receives approval for international distribution by January 31, 2018, Drewry will pay a $ 1,000,000 bonus. The bonuses are payable when a U. S. patent is approved and when international distribution is approved. On the date the contract is signed, IT estimates that there is an 80% chance it will receive U. S. patent protection by March 15, 2018, but only a 30% chance that the equipment will be approved for international distribution. TI received a U. S. patent on the equipment design on November 15, 2017, and immediately billed Drewry and received its bonus payment. On December 31, 2017, TI has incurred $ 1,760,000 of contract costs and is 80% complete. TI won approval for international distribution on January 15, 2018, and completed the equipment project on April 15, 2018, at a cost of $ 2,200,000.

Required:

1. Identify the performance obligations in the contract.

2. Provide the journal entries that TI should make to recognize revenue from the contract.

SOLUTION

1. There is one performance obligation in the contract. The U.S. patent and the 1. international distribution are not performance obligations because TI cannot benefit from either the patent or the international distribution rights on its own or with other readily available resources (not capable of being distinct) nor are these rights separately identifiable from other promises in the contract (not distinct within the context of the contract).

2. 2017

Jan. 2 Accounts Receivable .................................................. 1,500,000

Partial Billings ........................................................... 1,500,000

2 Cash ........................................................................... 1,500,000

Accounts Receivable .................................................. 1,500,000

On the date the contract is entered into, TI would determine the transaction price to be $3,300,000 ($3,000,000 + the probable $300,000 U.S. bonus). The international bonus would not be included because it is not probable that it will be received.

2017

Nov. 15 Accounts Receivable ..................................... 300,000

Partial Billings ........................................................... 300,000

15 Cash ........................................................................... 300,000

Accounts Receivable .................................................. 300,000

Dec. 31 Construction in Progress ................................. 1,760,000

Materials Inventory, Cash, etc. ................................... 1,760,000

Construction Expense .................................................. 1,760,000