On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $87,600. The system included finely tuned scales that fit into EverFresh’s automated assembly line, Ortiz’s proprietary software modified to allow the weighing system to function in EverFresh’s automated system, and a one-year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz’s systems.) If Ortiz was to provide these goods or services separately, it would charge $58,000 for the scales, $10,000 for the software, and $32,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date. Assume that the scales, software and calibration service are all separate performance obligations. How much revenue will Ortiz recognize in 2021 for this contract?

Ortiz & Co.

Ortiz & Co will recognize $71,341 revenue in 2021 for this contract.

Explanation:

a) Data and Calculations:

Contract price = $87,600

Separate performance contracts:

                     Scale         Software     Calibration       Total

Separate    $58,000      $10,000        $32,000       $100,000

Percentage   58%            10%                32%

Contract    $50,808       $8,760          $28,032        $87,600

2021 revenue

 recognition   100%       100%            5/12 (42%)

Recognized

 revenue  $50,808       $8,760            $11,773          $71,341

2022 revenue    0                  0          $16,259

b) The revenue for the calibration of the equipment and software will not be fully recognized in 2021 because it is a one-year contract. Since the calibration commenced on August 1, 2021, only revenue for 5/12 months or 42% (amounting to $11,773) will be recognized in 2021.  The remaining 58% or 7/12 months' revenue of $16,259 will be recognized in 2022.

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