Summary Business Accounting

Question:

Sarjit Systems sold software to a customer for $90,000. As part of the contract, Sarjit promises to provide

“free” technical support over the following six months. Sarjit sells the same software without technical

support for $80,000 and a stand-alone six-month technical support contract for $20,000, so these products

would sell for $100,000 if sold separately. Prepare Sarjit’s journal entry to record the sale of the software

(ignore any potential entry to revenue or cost of sales).



Answer:



Based on relative stand-alone selling prices, the software comprises 80% of the total fair values

($80,000 ÷ ($20,000 + 80,000)), and the technical support comprises 20% ($20,000 ÷ ($20,000 +

80,000)). Therefore, the seller would recognize $72,000 ($90,000  80%) in revenue up front when

the software is delivered, and defer the remaining $18,000 ($90,000  20%) and recognize it ratably

over the next six months as the technical support service is provided, making the following journal

entry:

Cash 90,000

Revenue 72,000

Unearned revenue 18,000