Problem: Quest Tech, Inc. manufactures and sells specialized data storage equipment and services to entertainment and media companies. The equipment is used to efficiently store large data files. Quest Tech is currently marketing its latest equipment, which includes the Company's new patented technology that significantly increases its storage efficiency and reduces data corruption risk to a low level. Quest Tech entered into a contract with Dynamic Co., which operates several data centers throughout the world.
Please consider the following additional facts and write a position paper documenting Quest Tech's revenue recognition considerations and conclusions in three pages or less. You can use FASB.org for the information or any other research tool.
- Quest will deliver five data storage units to Dynamic. Dynamic may purchase additional units at a discount of 35% off the list price.
- Quest Tech will provide maintenance services for a period of 1 year. Dynamic has the option to extend these services on an annual basis.
- Quest Tech will install the Equipment no later than 30 days after delivery.
- Dynamic will pay to Quest Tech the sum of $5,000,000 upon execution of this agreement.
- In the event Dynamic renews the maintenance services, Dynamic will pay to Quest Tech the sum of $1,000,000 upon each annual renewal. Other vendors provide installation services, but Quest Tech does not provide installation services separately.
- Quest Tech's competitors sell similar equipment for $1,000,000 per unit.