Problem

Your company sells a product bundle that costs $100,000, This product includes software valued at $75,000 and a 2 year service agreement with a value of $25,000 if sold separately. Your company installed the software on July 1, 2016, and the client paid $50,000; the balance is due on December 31, 2016. Identify the performance obligations and the revenue in 2016, assuming

(a) the performance obligations are interdependent and

(b) the performance obligations are not interdependent

For each of the case:

1. determine whether the seller should recognize revenue (a) over time or (b) when the product or service is completed.

2. Explain your answer using GAAP revenue recognition rules.

3. Explain how each would appear on the income statement and balance sheet.