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Allocating the Transaction Price. HeavyEQ produces large conveyor belt systems for heavy manufacturing. HeavyEQ signs a...

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Advance Math

Allocating the Transaction Price. HeavyEQ produces largeconveyor belt systems for heavy manufacturing. HeavyEQ signs a $2million ?xed-price contract under which it makes threepromises:

  • Install a conveyor belt system: fair value $1.6 million
  • Service the system over a ?ve-year period: fair value $0.6million
  • Provide a warranty assuring that the conveyer belt meets thecontract speci?cation at the time of sale: fair value $0.2millioN

REQUIRED

a. Allocate the transaction price to the performanceobligations.

b. Reallocate the transaction price under the notion thatHeavyEQ has no reasonable basis for determining the fair value ofthe servicing because the conveyor system is of such a uniquenature that the servicing activities are highly variable anduncertain

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