Research Case – Mirabella Security Equipment
ACCT 351 Research Case – Mirabella Security Equipment Mirabella, Inc. sells security equipment and computer integration services. It has not sold the integration service separately because its equipment cannot operate without being fully integrated with a computer system. Such integration requires significant customization. Competitors in the area are not able to provide these highly customized computer integration services. Mirabella’s sales manager recently obtained a signed contract from Jemison Brothers to provide computer integration services for security equipment at a cost of $10 million. Once everything is operational, full payment is due. Jemison will not get control of the equipment until the completion of integration. Management expects to have the system fully operational in the 12th month of the contract. To sweeten the deal, the sales manager offered to provide 5-year maintenance service for free, which typically sells for $300,000 During the initial negotiation of this contract, the contract price was set to $10.1 million in cash payment. However, as both parties finalize contract negotiations, Jemison agrees to give Mirabella its old security equipment in exchange for a credit of $100,000. It is expected that this old security equipment will not be decommissioned until the new equipment is operational. Mirabella believes it is probable that the estimated fair value of the old equipment at the contract inception date is $115,000. There is a provision in the contract that Jemison will receive a discount of $500,000 from the contract price of $10 million if they pay within three days of the date the contract is signed. Jemison wired $9.5 million to Mirabella two days after the contract was signed. Jemison has offered a bonus to Mirabella if the integration finishes early and Mirabella agreed to pay a penalty if it fails to meet the 12-month deadline to complete the integration. Mirabella has a large number of contracts with bonus characteristics similar to the contract with Jemison. The following is the schedule of the potential bonus or penalty. While no specific outcome is probable, Mirabella’s management assessment of the likelihood of completing the integration in the specified time frame is based on significant historical experience with similar integration jobs. Required: ACCT 351 Research Case – Mirabella Security Equipment Analyze steps 1 through 5 of the revenue recognition standards, i.e., identify the contract, identify the performance obligations, and determine the transaction price. Then allocate the transaction price among performance obligations, and finally discuss how and when revenue should be recognized. Provide detailed steps to support your conclusion and journal entries. Please concisely and carefully discuss each of the five steps, what FASB codifications you used, and on what basis conclusions are reached. Prepare a report that is three pages MAX, including necessary tables and calculations. There is no need to have a separate reference page. You just need to properly cite the ASC codes (e.g., according to ASC 606-10-25-19, a contract contains multiple performance obligations if … This contact has N performance obligations because …) *Make sure to use ASC606, not ASC605 *Journal entry is required for step 5. You also need to discuss how and when revenue is recognized for each performance obligation. *Starting this year (2023), FASB codification becomes free to access. https://asc.fasb.org/Login You can continue to use our current AAA logins by clicking http://www2.aaahq.org/ascLogin.cfm until the cutover date of Monday, February 27, 2023.
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