Precision Company is a public company manufacturing equipment. Precision's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $ 140,000 to $ 1,200,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. So installation can be performed by other vendors. Precision had the following transactions with Rose Inc. on June 20, 2020. • Rose signed a contract to purchase equipment from Precision for a price of $200,000 (installation included). Using market data, Rose determines installation service is estimated to have a fair value of $ 20,000. The cost of the equipment is $ 78,000 and the labor cost of the installation is $1,000. • The price of $200,000 includes a warranty guarantee that the equipment is free from any defects. The term of the assurance warranty is two years, with an estimated cost of $3,000. • Precision provides an extended warranty for three years beyond the two-year period. The extended warranty is sold separately. The price of the extended warranty for the equipment sold to Rose is $12,000, with an estimated cost of $6,000. Rose purchased the extended warranty. • Rose paid Precision the $ 200,000 for the equipment and $12, 000 for the extended warranty.
Precision Company is a public company manufacturing equipment. Precision's products range from simple automated machinery to complex systems containing numerous components. Unit selling prices range from $ 140,000 to $ 1,200,000 and are quoted inclusive of installation. The installation process does NOT involve changes to the features of the equipment to perform specifications. So installation can be performed by other vendors. Precision had the following transactions with Rose Inc. on June 20, 2020. • Rose signed a contract to purchase equipment from Precision for a price of $200,000 (installation included). Using market data, Rose determines installation service is estimated to have a fair value of $ 20,000. The cost of the equipment is $ 78,000 and the labor cost of the installation is $1,000. • The price of $200,000 includes a warranty guarantee that the equipment is free from any defects. The term of the assurance warranty is two years, with an estimated cost of $3,000. • Precision provides an extended warranty for three years beyond the two-year period. The extended warranty is sold separately. The price of the extended warranty for the equipment sold to Rose is $12,000, with an estimated cost of $6,000. Rose purchased the extended warranty. • Rose paid Precision the $ 200,000 for the equipment and $12, 000 for the extended warranty.
Chapter14: Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions
Section: Chapter Questions
Problem 7DQ
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Transcribed Image Text:Precision Company is a public company manufacturing equipment, Precision's products range from simple
automated machinery to complex systems containing numerous components. Unit selling prices range from $
140,000 to $ 1,200,000 and are quoted inclusive of installation. The installation process does NOT involve
changes to the features of the equipment to perform specifications. So installation can be performed by other
vendors.
Precision had the following transactions with Rose Inc. on June 20, 2020.
• Rose signed a contract to purchase equipment from Precision for a price of $200,000 (installation
included). Using market data, Rose determines installation service is estimated to have a fair value
of $ 20,000. The cost of the equipment is $ 78,000 and the labor cost of the installation is $1,000.
• The price of $200,000 includes a warranty guarantee that the equipment is free from any defects.
The term of the assurance warranty is two years, with an estimated cost of $3,000.
• Precision provides an extended warranty for three years beyond the two-year period. The extended
warranty is sold separately. The price of the extended warranty for the equipment sold to Rose is
$12,000, with an estimated cost of $6,000. Rose purchased the extended warranty.
• Rose paid Precision the $ 200,000 for the equipment and $12, 000 for the extended warranty.
Precision delivered the equipment on August 1, 2020, and completed the installation of the equipment on
October 1, 2020. The equipment has a useful life of 7 years. Assume the equipment and the installations are
two distinct performance obligations that should be accounted for separately.
Requirements:
a) How should the transaction price of $ 200,000 be allocated among the equipment and the installations?
(Show all supporting calculations)
b) Prepare the journal entries for Precision for transactions on June 20, August 1, and October 1, 2020.
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