Check your answer
Write your response and explain your reasoning.
Fictional Summit Monitoring has an established Topic 606 contract. It promises a standard monitoring device, routine installation, twenty-four monthly support periods, internal account setup, a defect-only warranty, and an option for one future calibration service.
The device works with qualified third-party installation, and other vendors sell the same installation service. Summit does not integrate, modify, or customize the device or installation. Neither promise significantly affects the other. Each monthly support period is capable of being distinct, transfers over time, and uses the same time-based measure of progress. Account setup only prepares Summit's system and transfers no benefit to the customer. The warranty cannot be purchased separately and provides no service beyond assurance that the device meets agreed specifications.
The future calibration has a $150 standalone selling price. Comparable customers receive an ordinary 20 percent discount without this contract. The option exercise price is $90, and the supplied exercise likelihood is 75 percent. The current contract's transaction price is $1,000. The aggregate standalone selling price of the current goods and services is $977.50; their individual standalone selling prices are outside this exercise.
Build the promise and performance-obligation map. Apply both distinctness tests, the series criteria, the setup and warranty boundaries, and the customer-option test. Estimate the option's standalone selling price and allocate the current transaction price between the current obligations in aggregate and the option. State one changed fact that combines the device and installation and one that removes the material right.
Use ASC 606-10-25-14 through 25-22 for promise identification, the series, setup activities, and distinctness. Use 55-30 through 55-34 for the warranty and 55-41 through 55-44 for the option.
Compare your reasoning with the worked answer
Summit has four performance obligations: the device, routine installation, the twenty-four-month support series, and the material right. The device and installation are each capable of being distinct because the device works with other installers and other vendors provide installation. They are also distinct in the contract context. Summit supplies no significant integration, modification, customization, or interdependence.
Each monthly support period is distinct, transfers over time, and uses the same time-based measure. The twenty-four periods therefore form one series performance obligation. Account setup is an internal fulfillment activity that transfers no benefit, so it is not a promised service. The defect-only warranty cannot be purchased separately and supplies no service beyond assurance. Route it to the applicable warranty model rather than count it as a Topic 606 performance obligation.
Comparable customers can buy the future calibration for $120 after the ordinary discount. Summit's option price of $90 gives this customer an incremental $30 discount. Adjusting that amount for the 75 percent exercise likelihood gives an estimated option standalone selling price of $22.50. The aggregate standalone selling price is $1,000: $977.50 for the current goods and services plus $22.50 for the option. The supplied $1,000 transaction price allocates $977.50 to the current obligations in aggregate and $22.50 to the material right. A separate allocation among the current obligations requires their individual standalone selling prices.
If Summit instead integrated and significantly customized the device and installation into one output, those promises would be combined. If the option exercise price were $120, it would match the ordinary discounted price and provide no incremental discount under these facts. It would be a marketing offer rather than a material-right performance obligation. The $22.50 allocation is recognized when the calibration transfers or the right expires, not when the option is granted.