Reference no: EM132468712

Point 1: EYE SPY sells sophisticated video surveillance equipment. EYE SPY sells the equipment and computer integration services together. It does not sell these separately. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration.

Point 2: Other competitors could theoretically provide computer integration services. Historically, EYE SPY has not sold maintenance services. The sales manager for EYE SPY has just obtained a signed contract from Secret Manufacturing (SM) to provide and perform computer integration services for surveillance equipment at a cost of $10 million, and have everything operational within one year, at which time full payment is due. SM will not get control of the video surveillance equipment until the integration is completed and EYE SPY turns control of the system over to SM. Management expects to be able to have the system fully operational and available for use by SM in the 12m month of the contract. EYE SPY believes this system would also be valuable to SM's competitors.

Point 3: The contract price of $10 million includes a five-year maintenance agreement that will commence after the installation is completed. SM has a great credit rating and always pays its bills. EYE SPY's sales manager is very pleased because he will receive a 2% bonus based on the gross sales contract price, and it is payable upon receipt of a signed contract.

Point 4: EYE SPY maintains a marketing group to work on contract proposals. The total annual salaries for the marketing group are $400,000. On average, the marketing group works on 20 proposals each year. This contract is expected to have a 15% to 20% margin.

Requirements:

Question 1: Review ASG 606-10-25-1. Perform step one of the revenue recognition model and identify the contract{s} with the customer. By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Question 2: Review 1180 606-10-25-14 through 21. Perform step two of the revenue recognition model and identity the performance obligation(s) in the contract(s). By reference to the applicable accounting literature, provide a detailed analysis to support your conclusion.

Question 3: Review ASG 340-40-25-1 through 3 on deterring costs. Record any required journal entries as of the date of receiving the signed contract. Prepare any required "T" accounts.