Question

1. During June 2019 Needs Business Company (NBC) runs a special offer whereby every customer who purchases a 4th of July picnic set receives a coupon for 2 dozen free gourmet hot dogs during the first week of July (presumably for use at a 4th of July picnic!). Two dozen gourmet hot dogs normally sell for $20. In a similar promotion run in October 2018 (2 free pumpkin pies during the week of Thanksgiving when a customer purchased inflatable turkey yard art in October) 65% of customers returned to the store during the week of Thanksgiving to pick up their free pies. In June 2019, NBC sold 300 4th of July picnic sets for $150 each. a. How many performance obligations are involved in the picnic set sales in June? Justify your response. b. What is the transaction price? C. Determine the transaction price allocated to each performance obligation. d. If NBC prepares financial statements monthly, what would be the timing of the recognition of revenue related to these transactions?

Answer 1

a. There are 2 performance obligations involved in the picnic set sales in June.

1. The delivery of the 4th of July picnic set.

2. The coupon for 2 dozen free gourmet hot dogs.

Both these are separate performance obligations since the delivery of the picnic set is distinct from the coupon redemption.

b. The transaction price is 300 x $150 = $45000.

c.

Performance Obligation	Standalone Price	Percent of total standalone price	Allocation of Transaction Price
4th of July picnic set (300 x $150)	$                  45,000	92%	$                                               41,400
Coupon (300 x $20 x 65%)	$                     3,900	8%	$                                                 3,600
Total	$                  48,900	100%	$                                               45,000

Based on the past experience of the Thanksgiving promotion wherein 65% of customers returned to the store, the same estimate is considered for computing the standalone price of the free hot dogs coupons.

d. The revenue from the sale of the 4th July picnic set will be recognized at the time of delivery of the picnic set while the revenue from the coupons will be recognized at the time of redemption of the coupons by the customer.