Asked by Caylee Pritchett on May 29, 2024
Verified
Peachpit Software Developers shipped its accounting package to a customer on September 10,2014.In addition to the software,Peachpit's contract requires the company to provide: (1)training to the customer's accounting staff during October of 2014 and again in January 2015 when the upgrade is released-75% of the training hours are provided during October,(2)technical product support for one year starting October 1,2014,and (3)a major upgrade to the software early in 2015.The customer paid the total contract price of $80,000 upon receipt of the invoice on September 17,2014.Peachpit would charge the following if these individual contract elements were sold separately:
Fair Value Accounting package (software) $65,000 Training customer’s staff 10,000 Customer support 15,000 Accounting software upgrade 10,000 Totals $100,000\begin{array} { l r } & \text { Fair Value } \\\text { Accounting package (software) } & \$ 65,000 \\\text { Training customer's staff } & 10,000 \\\text { Customer support } & 15,000 \\\text { Accounting software upgrade } & 10,000 \\\quad \text { Totals } & \$ 100,000\end{array} Accounting package (software) Training customer’s staff Customer support Accounting software upgrade Totals Fair Value $65,00010,00015,00010,000$100,000
Required:
a.Prepare a journal entry to record receipt of the cash payment.
b.Determine the amount of revenue to be recognized in 2014 and prepare the necessary journal entry.
Accounting Package
Software used by businesses for tracking financial transactions and managing accounts.
Technical Product Support
Assistance provided to customers or users related to technical aspects and functionalities of a product, ensuring proper usage and troubleshooting.
Accounting Software Upgrade
An enhancement or improvement made to accounting software to include new functionalities, fix bugs, or update security features.
- Understand the concepts and procedures related to revenue recognition for software companies.
Verified Answer
KK
Kevin KeeganMay 31, 2024
Final Answer :
a.To record cash receipt for bundled sale DR Cash \quad$80,000\$ 80,000$80,000
CR Unearned revenue \quad$80,000\$ 80,000$80,000
b.To determine revenue to be recognized on bundled sales,first allocate the total revenue to the various elements being sold based on the relative fair values of the elements if they were sold separately as follows: Fair value Percent of Total Fair Value Contract Price Allocation Accounting package (software) $65,00065%$52,000 Training customer’s staff 10,00010%8,000 Customer support 15,00015%12,000 Accounting software upgrade 10,00010%8,000 Totals $100,000$80,000\begin{array}{lrrr}&\text { Fair value } & \begin{array}{c}\text { Percent of } \\\text { Total Fair } \\\text { Value }\end{array} & \begin{array}{c}\text { Contract } \\\text { Price }\\ \text { Allocation }\end{array} \\\hline\text { Accounting package (software) } & \$ 65,000 & 65 \% & \$ 52,000 \\\text { Training customer's staff } & 10,000 & 10 \% & 8,000 \\\text { Customer support } & 15,000 & 15 \% & 12,000 \\\text { Accounting software upgrade } & 10,000 & 10 \% & 8,000 \\\text { Totals }&\$100,000&&\$80,000\end{array} Accounting package (software) Training customer’s staff Customer support Accounting software upgrade Totals Fair value $65,00010,00015,00010,000$100,000 Percent of Total Fair Value 65%10%15%10% Contract Price Allocation $52,0008,00012,0008,000$80,000
Revenue to be recognized in 2014 is based on the percentage of each element that has been rendered in 2014 as follows: Contract Price Allocation Percentage Rendered in 2014 Revenue Recognized in 2014 Accounting package (software) $52,000100%$52,000 Training customer’s staff 8,00075%6,000 Customer support (Oct.-Dec.) 12,00025%3,000 Software upgrade 8,0000%0 Totals $85,000$61,000\begin{array}{lrrr}&\begin{array}{c}\text { Contract } \\\text { Price }\\\text { Allocation } \end{array} & \begin{array}{c}\text { Percentage } \\\text { Rendered }\\ \text { in 2014 }\end{array} & \begin{array}{c}\text { Revenue } \\\text { Recognized }\\ \text { in 2014 }\end{array} \\\hline\text { Accounting package (software) } & \$ 52,000 & 100 \% & \$ 52,000 \\\text { Training customer's staff } & 8,000 & 75 \% & 6,000 \\\text { Customer support (Oct.-Dec.) } & 12,000 & 25 \% & 3,000 \\\text { Software upgrade } & 8,000 & 0 \% & 0\\\text { Totals }&\$85,000&&\$61,000\end{array} Accounting package (software) Training customer’s staff Customer support (Oct.-Dec.) Software upgrade Totals Contract Price Allocation $52,0008,00012,0008,000$85,000 Percentage Rendered in 2014 100%75%25%0% Revenue Recognized in 2014 $52,0006,0003,0000$61,000 To record revenue from bundled sale earned in 2014 DR Unearned revenue $61,000\quad \$ 61,000$61,000
CR Revenue $61,000\quad \$ 61,000$61,000
CR Unearned revenue \quad$80,000\$ 80,000$80,000
b.To determine revenue to be recognized on bundled sales,first allocate the total revenue to the various elements being sold based on the relative fair values of the elements if they were sold separately as follows: Fair value Percent of Total Fair Value Contract Price Allocation Accounting package (software) $65,00065%$52,000 Training customer’s staff 10,00010%8,000 Customer support 15,00015%12,000 Accounting software upgrade 10,00010%8,000 Totals $100,000$80,000\begin{array}{lrrr}&\text { Fair value } & \begin{array}{c}\text { Percent of } \\\text { Total Fair } \\\text { Value }\end{array} & \begin{array}{c}\text { Contract } \\\text { Price }\\ \text { Allocation }\end{array} \\\hline\text { Accounting package (software) } & \$ 65,000 & 65 \% & \$ 52,000 \\\text { Training customer's staff } & 10,000 & 10 \% & 8,000 \\\text { Customer support } & 15,000 & 15 \% & 12,000 \\\text { Accounting software upgrade } & 10,000 & 10 \% & 8,000 \\\text { Totals }&\$100,000&&\$80,000\end{array} Accounting package (software) Training customer’s staff Customer support Accounting software upgrade Totals Fair value $65,00010,00015,00010,000$100,000 Percent of Total Fair Value 65%10%15%10% Contract Price Allocation $52,0008,00012,0008,000$80,000
Revenue to be recognized in 2014 is based on the percentage of each element that has been rendered in 2014 as follows: Contract Price Allocation Percentage Rendered in 2014 Revenue Recognized in 2014 Accounting package (software) $52,000100%$52,000 Training customer’s staff 8,00075%6,000 Customer support (Oct.-Dec.) 12,00025%3,000 Software upgrade 8,0000%0 Totals $85,000$61,000\begin{array}{lrrr}&\begin{array}{c}\text { Contract } \\\text { Price }\\\text { Allocation } \end{array} & \begin{array}{c}\text { Percentage } \\\text { Rendered }\\ \text { in 2014 }\end{array} & \begin{array}{c}\text { Revenue } \\\text { Recognized }\\ \text { in 2014 }\end{array} \\\hline\text { Accounting package (software) } & \$ 52,000 & 100 \% & \$ 52,000 \\\text { Training customer's staff } & 8,000 & 75 \% & 6,000 \\\text { Customer support (Oct.-Dec.) } & 12,000 & 25 \% & 3,000 \\\text { Software upgrade } & 8,000 & 0 \% & 0\\\text { Totals }&\$85,000&&\$61,000\end{array} Accounting package (software) Training customer’s staff Customer support (Oct.-Dec.) Software upgrade Totals Contract Price Allocation $52,0008,00012,0008,000$85,000 Percentage Rendered in 2014 100%75%25%0% Revenue Recognized in 2014 $52,0006,0003,0000$61,000 To record revenue from bundled sale earned in 2014 DR Unearned revenue $61,000\quad \$ 61,000$61,000
CR Revenue $61,000\quad \$ 61,000$61,000
Learning Objectives
- Understand the concepts and procedures related to revenue recognition for software companies.