Reference no: EM132929805

Question - Scenario - Puddle, Inc signs an agreement with Up Corp. Puddle will provide and install a major new computerized fabrication system in Up's new factory. Puddle will also provide updates to the software and perform any maintenance and troubleshooting of the system for the next three years. The agreed upon price for the whole contract is $14,800,000. Puddle sells/installs similar fabrication systems without the maintenance contract for about $12 million. The usual price for monthly maintenance when that is provided alone is $110,000 per month.

Because time is of the essence, the agreement further stipulates that if Puddle can have the system up and running in 60 days from the date of the signed contract then Puddle will be paid an extra $200,000 and if the system takes over 120 days to have up and running (including testing) then Puddle will be penalized $200,000 (be paid only 14,600,000). Furthermore, if Up pays Puddle within 20 days of completion of the project in cash, there will be a 5% discount applied to the entire amount. This is standard for Puddle to offer this discount and almost all customers take advantage of it.

Required -

1. Apply the five step revenue recognition model to the arrangement Puddle and Up focusing on the accounting for revenue by Puddle.

2. Give the journal entries needed for Puddle to record the completion of the project on day 59. (Don't worry about tracking the costs)

3. Give the journal entries needed for Puddle to record the completion of the project on day 122. (Don't worry about tracking the costs)

4. Give the journal entries for each subsequent month after completion of the project as maintenance is provided.