(See attached file for full problem description)
Using historical data and some forecasting models, a company identifies two types of customers it serves. The first group it calls the "steady spenders" and the second group it labels the "future loyals". It expects to recruit 1000 of each type for the current period (period 0). Anticipated results are in the table below. The first column is the time period, the second column for each cohort is the expected number active during that period, the third column the spending by an active customer, and the fourth column the incremental costs to service an active customer.
The expert determines the incremental costs to service an active customer. Historical data and forecasting models are used.
Quest Tech: Multiple arrangement revenue recognition
Quest Tech, Inc. manufactures and sells specialized data storage equipment and services to entertainment and media companies. The equipment is used to efficiently store large data files. Quest Tech is currently marketing its latest equipment, which includes the Company's new patented technology that significantly increases its storage efficiency and reduces data corruption risk to a low level. Quest Tech entered into a contract with Dynamic Co., which operates several data centers throughout the world.
Please consider the following additional facts and write a position paper documenting Quest Tech's revenue recognition considerations and conclusions in three pages or less. You can use FASB.org for the information or any other research tool.
- Quest will deliver five data storage units to Dynamic. Dynamic may purchase additional units at a discount of 35% off the list price.
- Quest Tech will provide maintenance services for a period of 1 year. Dynamic has the option to extend these services on an annual basis.
- Quest Tech will install the Equipment no later than 30 days after delivery.
- Dynamic will pay to Quest Tech the sum of $5,000,000 upon execution of this agreement.
- In the event Dynamic renews the maintenance services, Dynamic will pay to Quest Tech the sum of $1,000,000 upon each annual renewal. Other vendors provide installation services, but Quest Tech does not provide installation services separately.
- Quest Tech's competitors sell similar equipment for $1,000,000 per unit.