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Ride Company (“Ride”) is a well-established amusement park transport and equipment manufacturer, specializing in design, manufacturing and installation of theme park trains, giant wheels and coasters. On 12 January 2022, Ride signed a “5km Rail + Park Trains” contract with Wonder Corporation (“Wonder”), the operator of an amusement park in Hong Kong. 

The contract specified that Ride will:

 (1) construct a 5km rail inside the park; 

(2) deliver and install two park trains upon the completion of the rail; and

(3) provide maintenance service of the rail and park trains for 2 years after they are constructed / delivered and installed. 

The total transaction price of the contract is $2 million. Throughout the whole construction process, the 5km rail belongs to Wonder. In January 2022, Wonder borrowed $1 million from the bank to finance the construction of the rail and obtained a $500,000 government grant to support the purchase of the park trains.

The standalone-selling price of Ride’s products and services are extracted from the company’s website as follows: 

Product/ Service Stand-alone selling price Standard 5km Rail construction $1,200,000 

Park train (per train, with installation service) $400,000 

Maintenance service (per year) $250,000

Installation service is provided with the delivery of the park trains because of the complexity of the installation procedures. The maintenance service can be provided by other companies. The construction started on 1 February 2022 and was completed on 31 December 2022. The trains were delivered and installed on 31 December 2022. The rail and the park trains were ready for use on 31 December 2022 and are expected to have a useful life of 10 years. The maintenance service started on 1 January 2023. The cost of the rail and the park train is recorded in the account “Park Equipment”. To facilitate the sales of the park tickets, Wonder engaged Happy Agent Company (“Happy Agent”), a local tour agency, to sell the park tickets to various customers. Happy Agent collects the full park ticket fee from customers and charges Wonder a commission based on the sales of park tickets

Required (No journal entry is required for the requirements below):

A. Advise as to whether the interest expense incurred from Wonder’s $1 million bank loan shall be capitalized as the cost of the park equipment on Wonder’s book.

B. Advise two possible accounting treatments that Wonder could adopt regarding the $500,000 government grant for the purchase of park trains. 

C. Discuss and apply the 5-step process for revenue recognition to the “5km Rail + Park Trains” contract from Ride’s perspective. Show all the calculations for Step 4. 

D. Regarding Happy Agent’s ticket selling for Wonder, explain the performance obligation(s) involved for both parties. Describe how revenue should be recognized for Happy Agent and for Wonder, respectively. 

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