Comfort King Ltd. sells central air units and furnaces to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes installation, maintenance on the central air unit for two years, and a one-time furnace cleaning, which will occur when the central air unit is installed. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation, central air maintenance, and furnace cleaning services separately to its customers as follows: installation fee $ 400, annual central air maintenance fee $ 250, and furnace cleaning fee $ 100. Comfort King installed the unit and cleaned the furnace on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.
1. Is there a contract?
2. What is the performance obligation?
3. What is the transaction price?
4. Is there a need to allocate the selling price?
5. Has the performance obligation been satisfied?

Question

Quizplus · Accepted Answer

The Answer of Comfort King Ltd. sells central air units and furnaces to local residents as well as ongoing maintenance plans. Jack Frost agreed to an arrangement with Comfort King to purchase a central air package for $ 4,000 on May 1, 2021. In addition to the sale, the arrangement includes installation, maintenance on the central air unit for two years, and a one-time furnace cleaning, which will occur when the central air unit is installed. Jack Frost is receiving a great deal as the full contract price represents the stand-alone value of the central air unit. Comfort King also provides installation, central air maintenance, and furnace cleaning services separately to its customers as follows: installation fee $ 400, annual central air maintenance fee $ 250, and furnace cleaning fee $ 100. Comfort King installed the unit and cleaned the furnace on May 20, 2021, and was immediately paid the agreed-upon price by Jack Frost.
Instructions
Complete the following steps to determine if the appropriate criteria have been met for Comfort King to recognize revenue under the contract-based approach to revenue recognition. Be sure to conclude whether Comfort King can recognize the revenue and when it would be appropriate to do so.
1. Is there a contract?
2. What is the performance obligation?
3. What is the transaction price?
4. Is there a need to allocate the selling price?
5. Has the performance obligation been satisfied?