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Coconut Company

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Submitted By DianaB21
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1. No, FASB 985-605 does not apply to the arrangement with Buffett. According to FASB 985-605-15-4 e “Software components of tangible products that are sold, licensed, or leased with tangible products when the software components and nonsoftware components of the tangible product function together to deliver the tangible product’s essential functionality”, since the management system and the year of customer support can function without each other this does not apply to the arrangement.
2. The revenue would be recognized as a multiple deliverable because the Volcano System can be sold without the customer support and the customer support can be sold without the Volcano System. According to FASB 605-25-5a “The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s)”. Entries to recognize the revenue and deferred revenue would be:
Cash 12,000 Deferred Revenue 12,000
Deferred Revenue 10,286 Revenue 10,286
Deferred Revenue 286
Revenue 286
3. It should be accounted for as one contract. According to FASB 605-25-25-3 “separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and shall, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting”. Since this new contract was entered into 3 months after the original with the same entity to extent existing service it should be considered one contract.
4. This contract should be accounted for

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