Manini Manufacturing Essay

551 words - 3 pages

Case 06-5: Manini Manufacturing
In the case Manini Manufacturing, the issue at hand is when revenue should be recognized in a contract that involves multiple deliverables. The contract covers the sale, installation and servicing of one unit of NXPR 101 precision semiconductor manufacturing equipment.
Equipment, Installation, and Service Fees
1) Initial Fee due upon Contract Signing $50,000
2) Delivery of Test Data $150,000
3) Delivery of Equipment (NXPR 101) $300,000
4) Completion of Installation $500,000
Total Equipment and Installation Fee $1,000,000

A vendor should evaluate all deliverables in an arrangement to determine whether they represent separate units of accounting. This evaluation must be performed at the inception of the arrangement and as each item in the arrangement is delivered. The first item in the ...view middle of the document...

This asset does have standalone value of $300,000 and can be resold in the used-equipment market. The forth item in the arrangement is installation of the equipment. The installation service is required to get the NXPR 101 in operating condition and has a standalone basis because it can be performed by third party installers as well as by Manini at a cost of approximately $150,000.

Journal Entries:
1/2/03: (Contract Signing)
Accounts Receivable 50,000 Deferred Revenue – NXPR 101 50,000

1/31/03: (Delivery of Test Data)
Accounts Receivable 150,000 Deferred Revenue - NXPR 101 150,000
2/25/03: (Shipment of Equipment)
Accounts Receivable 300,000 Deferred Revenue – NXPR 101 300,000

4/15/03: (Completion of Installation)
Accounts Receivable 550,000 Deferred Revenue – NXPR 101 500,000 Deferred Service Revenue - NXPR 101 50,000

5/15/03: (Monthly Recognition of Revenue)
Deferred Revenue – NXPR 101 83,333 Deferred Service Revenue - NXPR 101 4,167 Revenue 87,500

Although the machine does have standalone value and there is a market to provide installation services, installation is essential to the functionality of the equipment and significantly changes its capabilities. Under the principle of conservatism, revenue should not begin to be recognized until the machinery is in operating form as agreed upon in the sales contract. The equipment is delivered and operating as promised on 4/15/03, which is the date that revenue should begin to be recognized. There is a one year guarantee period in which Ulua, Inc. has the right of return. Revenue should be recognized on a straight line basis over this period of time. On 4/15/03, Manini also enters into an annual maintenance and support contract which is collected upfront. This revenue will initially be deferred, and recognized on a monthly basis throughout the year in which service is provided.

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