Pleasant Heating & Cooling (PHC) Co. manufactures furnaces and air conditioners that are in great demand for residential homes. Customers may purchase the furnace separately from the air conditioner or as a “package”. Brook Hills Builders is in the process of building a new housing development which will include 100 new homes. Brook Hill Builders has acquired land and is planning on building a 100 luxury home neighborhood. Brook Hill Builders is projecting the homes will be completed during the between June – July 2022. On February 18, 2021 PHC entered into a written agreement with Brook Hills Builders for 100 furnaces and air conditioners. The agreement stipulated that PHC will build and install the furnaces and air conditioners in the 100 homes on or before May 31st, 2022. Brook Hill Builders decided to hire one company to do all of the work even though the work could have been split between different companies. Brook Hill Builders has excellent credit. The total payment for the project is due on March 1, 2021. Brook Hill made the payment on time. Interest on comparable projects is equal to $65,000. PHC’s fiscal year is January 1-December 31 and is privately held. Brook Hills Builders is offering PHC an incentive to ensure completion & installation of the furnace and air conditioning units. The incentive is as follows: Completion of installation by April 15th, 2022: $75,000 Bonus Completion of installation by April 30th, 2022: $50,000 Bonus Completion of installation by May 15th, 2022: $25,000 Bonus On time completion: $0 Bonus After May 31st, 2022 $10,000 Penalty PHC estimates that based upon their significant experience in the industry that they have a 70% likelihood of completing the installation by April 15th, 10% likelihood of completion by April 30th , 8% likelihood the installation will be completed by May 15th , 7% likelihood it will be will be completed on time (i.e. May 31st) , and a 5% probability the installation will be completed after May31st. Brook Hill Builders and PHC agreed that the price for each furnace & air conditioning unit including installation would be $12,500. Each furnace & air conditioning unit has a one year base warranty but PHC offers an extended 2 year warranty for $1,200 for a total price of $13,700. PHC agrees to purchase the extended warranty for each of the furnace & air conditioning units. The standalone pricing is as follows: Standalone Pricing Furnace 8,400 Air Conditioning 7,000 Installation 1,225 Extended Warranty 875 Required: Apply the requirements of ASC 606; Revenue from Contracts with Customers. For each of the five steps describe how the revenue model applies to this transaction. If any step is not applicable simply indicate that it is not applicable. Clearly label & show all of your work.
Pleasant Heating & Cooling (PHC) Co. manufactures furnaces and air conditioners that are in great demand for residential homes. Customers may purchase the furnace separately from the air conditioner or as a “package”. Brook Hills Builders is in the process of building a new housing development which will include 100 new homes.
Brook Hill Builders has acquired land and is planning on building a 100 luxury home neighborhood. Brook Hill Builders is projecting the homes will be completed during the between June – July 2022. On February 18, 2021 PHC entered into a written agreement with Brook Hills Builders for 100 furnaces and air conditioners. The agreement stipulated that PHC will build and install the furnaces and air conditioners in the 100 homes on or before May 31st, 2022. Brook Hill Builders decided to hire one company to do all of the work even though the work could have been split between different companies. Brook Hill Builders has excellent credit.
The total payment for the project is due on March 1, 2021. Brook Hill made the payment on time. Interest on comparable projects is equal to $65,000. PHC’s fiscal year is January 1-December 31 and is privately held.
Brook Hills Builders is offering PHC an incentive to ensure completion & installation of the furnace and air conditioning units. The incentive is as follows:
Completion of installation by April 15th, 2022: $75,000 Bonus
Completion of installation by April 30th, 2022: $50,000 Bonus
Completion of installation by May 15th, 2022: $25,000 Bonus
On time completion: $0 Bonus
After May 31st, 2022 $10,000 Penalty
PHC estimates that based upon their significant experience in the industry that they have a 70% likelihood of completing the installation by April 15th, 10% likelihood of completion by April 30th , 8% likelihood the installation will be completed by May 15th , 7% likelihood it will be will be completed on time (i.e. May 31st) , and a 5% probability the installation will be completed after May31st.
Brook Hill Builders and PHC agreed that the price for each furnace & air conditioning unit including installation would be $12,500. Each furnace & air conditioning unit has a one year base warranty but PHC offers an extended 2 year warranty for $1,200 for a total price of $13,700. PHC agrees to purchase the extended warranty for each of the furnace & air conditioning units.
The standalone pricing is as follows:
|
|
Standalone Pricing |
|
Furnace |
8,400 |
|
Air Conditioning |
7,000 |
|
Installation |
1,225 |
|
Extended Warranty |
875 |
Required:
Apply the requirements of ASC 606; Revenue from Contracts with Customers. For each of the five steps describe how the revenue model applies to this transaction. If any step is not applicable simply indicate that it is not applicable. Clearly label & show all of your work.
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