Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75.
-Sullivan should recognize revenue for the two parts of the arrangement as follows:
A) Recognize the entire $500 when the customer pays cash to buy the package.
B) Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package; defer the portion attributable to technical support and recognize over the support period.
C) Defer the entire $500 and recognize over the support period.
D) Recognize the entire $500 upon conclusion of the support period.

Question

Sullivan Software sells packages of a software program and one year's worth of technical support for $500. Its packaging lists the $500 sales price as comprised of a software program at a price of $450 and technical support with a price of $100, with a $50 discount for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan sells the software program separately for $475 and offers a year of technical support separately for $75. 
-Sullivan should recognize revenue for the two parts of the arrangement as follows:
A) Recognize the entire $500 when the customer pays cash to buy the package.
B) Recognize the portion of the $500 attributable to the software program when the customer pays cash to buy the package; defer the portion attributable to technical support and recognize over the support period.
C) Defer the entire $500 and recognize over the support period.
D) Recognize the entire $500 upon conclusion of the support period.

Quizplus · Accepted Answer

According to the guidance in ASC 606-10-25-7, Sullivan should allocate the transaction price to each performance obligation based on its standalone selling price. In this case, the standalone selling price of the software program is $475, and the standalone selling price of the technical support is $75. Therefore, Sullivan should recognize $450 in revenue for the software program when the customer pays cash to buy the package and defer $50 in revenue for the technical support, recognizing it over the support period. This method is known as the "allocation method," and it reflects the economic reality of the transaction by recognizing revenue for each performance obligation as it is satisfied.

Sullivan Software Sells Packages of a Software Program and One