JK Software (JKS), a public company with quarterly reporting, signed a contract with JR Gardens on November 1, 2009. The contract sets forth the arrangements wherein JKS sells JR Gardens software and provides post-contract support (PCS). The agreement stipulates that the software will be delivered on December 15, 2009, and the PCS will commence on January 1, 2010, and continue through December 31, 2010. The software will be fully functional at delivery. The sales price that is stated in the agreement for this combined product is $500,000 and is to be paid upon delivery of the software.
JKS has never sold software without also providing PCS. Likewise, they do not provide PCS without having also sold the client the software. In addition, they have no plans of separating these services in the future. Other vendors have sold similar software for the following amounts:
Vendor Software PSC
AB $ 400,000 $ 250,000
CD $ 500,000 $ 50,000
EF $ 400,000 $ 200,000
GH $ 300,000 $ 300,000
The costs related to both the software and the PCS arrangement are significant and easily measurable.
Required:
a) Discuss what the general rules under US GAAP are for this transaction. Relevant literature is SOP 97-2 (ASC 985-605), Software Revenue Recognition. When, and how much, revenue is recognized by JK Software under US GAAP? Please provide all necessary journal entries.