CASE FACTS

Enlightening Engineering Inc. (EE) is a public company with a calendar year-end. In its current fiscal quarter, ending December 31, 2020, it entered into a sales agreement with Beyond Best Beverage (BBB) Ltd. Under the sales agreement, EE is selling an assembly line system to BBB that consists of the following four components:

_ Conveyor
_ Filler
_Capper
_Labeler

EE will use the assembly line to manufacture bottled beverage. The total contract price is $150,000. Under the agreement, BBB is also responsible for installing the assembly line system at EE’s Newark manufacturing facility and removing EE’s old assembly line from its manufacturing facility. Both installation and removal services are offered as “free of charge” when EE purchases the assembly line system from BBB.

The sales agreement between BBB and EE provides the following details regarding cash payment upon delivery.

Conveyor $ 43,000
Filler 43,000
Capper 43,000
Labeler 21,000
Total $150,000

The sales agreement is dated December 15, 2020. Customers rarely purchase the Conveyor, the Filler and the Capper separately because the three segments cannot be used in production without each other. If any of the three segments breaks down, most companies would choose to replace all three segments together.

BBB delivers the first two components of the assembly system on March 29, 2021, and agrees to deliver the Capper by the end of May. The capper normally should be delivered together with the Conveyor and the Filler because without the capper, the customers cannot use the conveyor and the filler in their manufacturing process. However, the delivery date for the Capper is delayed because BBB does not have that component of the assembly line system on hand at the time the sales agreement is entered into. As such, BBB has to manufacture that component of the line. Because of the backlog of orders BBB has in its manufacturing department at the time it enters into the sales agreement with EE, it cannot commit to delivering the Capper segment to EE until the end of May. BBB actually delivers the capper segment on May 10, 2021. BBB installed the three components on the same day. The installation service requires some modification of the assembly line and is essential for the three components to function as desired by EE.

BBB removed the old assembly line system from EE’s manufacturing facility on May 15, 2021.

In addition to the above information, BBB also provided their inventory and service costs associated with fulfilling the arrangement with EE:
Cost
Conveyor $40,000
Filler 20,000
Capper 16,000
Labeler 10,000
Removal 3,000
Installation 1,600
Total: $90,600

CASE REQUIREMENTS

BBB is concerned with revenue recognition issues related to its sales agreement with EE. In its deliberations, BBB asks for your help. Prepare a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature, particularly on Topic 606, FASB’s Accounting Standards Update No. 2014-09 and other relevant subsequent updates. Discuss the support in that literature for your conclusions and be sure to cite the relevant components of the Codification in your discussion. Conclusions reached in applying the authoritative literature to the case facts are the most convincing. Citations are not required for journal entries.

1. How many performance obligations can you identify in the sales agreement between BBB and EE? Use the authoritative literature and cite the Accounting Standard Codification (ASC) number(s) to explain your answer.
2. Based on your answer to Question 1, allocate the total contract price charged by BBB to each performance obligations. Explain the methods you used and cite the ASC numbers.
3. For each performance obligation you have identified in Question 1, specify whether you are able to recognize revenue at a point in time or over a period of time. Explain your answer and cite the ASC numbers. If you believe certain performance obligation(s) are satisfied over time, help BBB determine the approach (es) it can use to allocate revenue over time. Explain your answer and cite the ASC numbers.
4. When a contract contains multiple performance obligations, the contract price is usually a discounted price of the sum of the standalone selling prices of each performance obligation. Use BBB’s case as an example, discuss how to treat discounts in contracts with multiple performance obligations. Cite the proper ASC numbers.
5. Based on your answers to Question 1, Question 2 and Question 3, how much revenues (if any) and expenses (if any) should BBB recognize in the following periods? Write all journal entries BBB needs on each important date in the following quarters.
   a. The quarter ending December 31, 2020?
   b. The quarter ending March 30, 2021?
   c. The quarter ending June 30, 2021?

On July 1, 2009, the Financial Accounting Standards Board (FASB) instituted a major change in the way accounting standards are organized. On that date, the FASB Accounting Standards Codification (FASB Codification) became the single source of authoritative, nongovernmental U.S. generally accepted accounting principles (U.S. GAAP). Now, only one level of authoritative U.S. GAAP exists, other than guidance issued by the Securities and Exchange Commission (SEC). All other literature will be non-authoritative.

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