ACCT 351 Research Case Spring, 2021 Mirabella Security Equipment
ACCT 351 Research Case Spring, 2021 Mirabella Security Equipment
Mirabella, Inc. sells security equipment, usually along with computer integration services. It does not sell these separately. The equipment cannot operate without being fully integrated with a computer system. Significant customization is required during this integration. Other competitors could theoretically provide the computer integration services.
The sales manager for Mirabella has just obtained a signed contract from Jemison Brothers to provide and perform computer integration services for security equipment at a cost of $10 million, and to have everything operational within one year, at which time full payment is due. Jemison will not get control of the equipment until the integration is completed. Management expects to have the system fully operational and available for Jemison’s use in the 12th month of the contract.
In the initial contract negotiation stage, the contract price with Jemison was $10.1 million in cash. However, as part of the final contract negotiations, Jemison agrees to give Mirabella its old security equipment in exchange for a credit of $100,000. It is expected that this old security equipment will not be decommissioned until the new equipment is operational. Based on its extensive experience, Mirabella believes it is probable that the estimated fair value of the old equipment at the contract inception date is $115, 000.
There is a provision in the contract that Jemison will receive a discount of $500,000 from the contract price of $10 million if they pay within three days of the date the contract is signed. Jemison wired $9.5 million to Mirabella two days after the contract was signed.
Jemison has offered a bonus to Mirabella if the integration is completed early and Mirabella agreed to pay a penalty if the integration is completed late. Mirabella has a large number of contracts with bonus characteristics similar to the contract with Jemison. The following is the schedule of the potential bonus or penalty. While no specific outcome is probable, Mirabella’s management assessment of the likelihood of completing the integration in the specified time fame is based on significant historical experience with similar integration jobs.
Required: Prepare a report (2-3 pages) discussing the following:
Analyze steps 1 through 3 of the revenue recognition model, i.e. identify the contract, identify the performance obligations, and determine the transaction price. Make sure to address, among the other issues, how the variable consideration issues should be treated and how the non-cash consideration of the old equipment should be treated. For purposes of this case, you can ignore time value of money issues.
In your analysis of each step, provide references to the ASC codification codes to support you
conclusion and journal entries. Prepare a report that is three pages MAX, including necessary tables,
journal entries, and calculations. There is no need to have a separate reference page if you properly cite
the ASC codes (e.g., according to ASC XXXXXXXXXX, a contract contains multiple performance
obligations if … This contact has X performance obligations because …)
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ACCT 351 Research Case
Spring, 2021
Mirabella Security Equipment
Mirabella, Inc. sells security equipment, usually along with computer integration services.
It does not
sell these separately. The equipment cannot operate without being fully integrated with a computer
system. Significant customization is
equired during this integration. Other competitors could
theoretically provide
the
computer integratio
n services.
The sales manager for Mirabella has just obtained a signed contract from Jemison Brothers to provide
and perform computer integration serv
ices for security equipment at a cost of $10 million, and
to
have
everything operational within one year, at which time full payment is due. Jemison will not get control
of the equipment until the integration
is completed. Management expects to have the
system fully
operational and available for Jemison’s use in the 12
th
month of the contract.
In the initial contract negotiation stage, the contract price with Jemison was $10.1 million in cash.
However, as part of the final contract negotiations, Jemison
agrees to give Mirabella its old security
equipment in exchange for a credit of $100,000. It is expected that this old security equipment will not
e decommissioned until the new equipment is operational. Based on its extensive experience,
Mirabella beli
eves it is probable that the estimated fair value of the old equipment at the contract
inception date is $115, 000.
T
here is a provision in the contract that Jemison will receive a discount of $500,000 from the contract
price of $10 million if th
ey pay wit
hin three days of the date
the contract is signed. Jemison wired $9.5
million to Mirabella two days after the contract was signed.
Jemison has offered a bonus to Mirabella if the integration is completed early and Mirabella agreed to
pay a penalty if th
e integration is completed late. Mirabella has a large number of contracts with bonus
characteristics similar to the contract with Jemison. The following is the schedule of the potential bonus
or penalty.
While no specific outcome is probable, Mirabella
’s management assessment of the
likelihood of completing the integration in the specified time fame is based on significant historical
experience with similar integration jobs.
ACCT 351 Research Case Spring, 2021 Mirabella Security Equipment
Mirabella, Inc. sells security equipment, usually along with computer integration services. It does not
sell these separately. The equipment cannot operate without being fully integrated with a computer
system. Significant customization is required during this integration. Other competitors could
theoretically provide the computer integration services.
The sales manager for Mirabella has just obtained a signed contract from Jemison Brothers to provide
and perform computer integration services for security equipment at a cost of $10 million, and to have
everything operational within one year, at which time full payment is due. Jemison will not get control
of the equipment until the integration is completed. Management expects to have the system fully
operational and available for Jemison’s use in the 12
th
month of the contract.
In the initial contract negotiation stage, the contract price with Jemison was $10.1 million in cash.
However, as part of the final contract negotiations, Jemison agrees to give Mirabella its old security
equipment in exchange for a credit of $100,000. It is expected that this old security equipment will not
e decommissioned until the new equipment is operational. Based on its extensive experience,
Mirabella believes it is probable that the estimated fair value of the old equipment at the contract
inception date is $115, 000.
There is a provision in the contract that Jemison will receive a discount of $500,000 from the contract
price of $10 million if they pay within three days of the date the contract is signed. Jemison wired $9.5
million to Mirabella two days after the contract was signed.
Jemison has offered a bonus to Mirabella if the integration is completed early and Mirabella agreed to
pay a penalty if the integration is completed late. Mirabella has a large number of contracts with bonus
characteristics similar to the contract with Jemison. The following is the schedule of the potential bonus
or penalty. While no specific outcome is probable, Mirabella’s management assessment of the
likelihood of completing the integration in the specified time fame is based on significant historical
experience with similar integration jobs.