Panarin Company entered into two contracts on the same date with Hjalmarsson Corporation. Panarin has provided the following analysis of price and cost for the contracts:
Contract AContract BContract price$125,000 $80,000 Cost of related goods 70,000 55,000 Gross profit (loss)$55,000 $25,000
Hjalmarsson, the customer, may cancel both contracts if either of them is not fulfilled by Panarin in a timely manner. Stand-alone prices are typically $120,000 for the goods in Contract A and $80,000 for the goods in Contract B.
Required:
- Should the two contracts be combined for purposes of applying the five-step revenue recognition model?
- What amount of revenue should Panarin associate with each of the contracts?
- When should revenue be recognized on each of the contracts?
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