Mirabella Security Equipment
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ACCT 351 Research Case - Mirabella Security Equipment Mirabella, Inc. sells security equipment, usually along with computer integration services. It has not sell these separately before. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors in the area could are not able to provide this highly customized computer integration services. The sales manager for Mirabella just obtained a signed contract from Jemison Brothers to provide and perform computer integration services for security equipment at a cost of $10 million, and to have everything operational within one year, at which time full payment is due. Jemison will not get control of the equipment until the integration is completed. Management expects to have the system fully operational and available for Jemison’s use 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 In the initial contract negotiation stage, the contract price with Jemison was $10.1 million in cash. However, as part of the final 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. Based on its extensive experience, 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 is completed early and Mirabella agreed to pay a penalty if the integration is completed late. 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 fame is based on significant historical experience with similar integration jobs. ACCT 351 Research Case - Mirabella Security Equipment Required: Analyze steps 1 through 5 of the revenue recognition model, 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. Please concisely and carefully discuss each of the 5 steps, what FASB codifications you used, and on what basis conclusions are reached. Prepare a report that is 2.5 pages MAX, including necessary tables and calculations. *No journal entry is required for step 5. You only need to discuss how and when revenue is recognized regarding each performance obligations.