Bella Security Equipment

Bella, Inc. sells security equipment and computer integration services. It has not sold the integration  service separately because its equipment cannot operate without being fully integrated with a computer  system. Such integration requires significant customization. Competitors in the area are not able to provide such highly customized computer integration services.  Bella’s sales manager recently signed a contract with Jemison Brothers. This contract provides installation of security cameras and computer integration services at a price around $10 million. To  sweeten the deal, the sales manager offered to provide a 5-year maintenance service for free, which  typically sells for $300,000. Bella expects to have the system fully operational in 12 months. Jemison will  not get control of the equipment until the completion of integration service.  During the initial negotiation of this contract, the contract price was set to $10.1 million in cash payment. However, as both parties finalize contract negotiations, Jemison agrees to give Bella its old  security equipment in exchange for a credit of $100,000. This old security equipment will not be decommissioned until the new equipment is operational. Bella estimates the fair value of the old  equipment at the contract inception date to be $115,000. There is another 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 Bella two days after the contract was signed.  Jemison has offered a bonus to Bella if the integration finishes early and Bella agreed to pay a penalty if it fails to meet the 12-month deadline to complete the integration. Bella 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, Bella’s management assessment of  the likelihood of completing the integration in the specified time frame is based on significant historical  experience with similar integration jobs. 

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