Question: On July1, 2020, EYE SPY received a signed contract for $10 million with all negotiated terms, as described in part 1. Taking the discount, SM wired $9.5 million to EYE SPY two days after the contract was signed. In the interest of full and expanded disclosure, EYE SPY has decided not to apply the practical expedient in ASC 606-10-32-18.
At the end of 11 months, the system is fully operational. The system has been tested and accepted by SM. The old surveillance equipment was decommissioned when the new system was installed. The old equipment was shipped to EYE SPY in month 11. The old surveillance equipment was sold the next month for $120,000. For the sake of simplicity, no financing component needs to be allocated to the maintenance contract.
EYE SPY has forecasted a cost of $8.136 million for the equipment and integration required by the contract. It has forecasted the cost of the maintenance services at $164,000.
Required:
How would the transaction price be allocated, if more than 1 performance obligation was identified in part 1?
When may revenue be recognized?
What are the implications for financial statements as of the 12th month of the contract? (Note: Even if you conclude that some journal entries should be recorded monthly, for purposes of this case, show the cumulative journal entry recorded for the 11th and 12th months.