Question

Creative Computing sells a tablet computer called the Protab. The $875 sales price of a Protab Package includes the following: • One Protab computer • A 6-month limited warranty. This warranty guarantees that Creative will cover any costs that arise due to repairs or replacements associated with defective products for up to six months. • A coupon to purchase a Creative Probook e-book reader for $180, a price that represents a 50% discount from the regular Probook price of $360. It is expected that 25% of the discount coupons will be utilized • A coupon to purchase a one-year extended warranty for $70. Customers can buy the extended warranty for $70 at other times as well. Creative estimates that 45% of customers will purchase an extended warranty • Creative does not sell the Protab without the limited warranty, option to purchase a Probook, and the option to purchase an extended warranty, but estimates that if it did so, a Protab alone would sell for $855 All Protab sales are made in cash Required: 1. & 2. Indicated below whether each item is a separate performance obligation and allocate the transaction price of 90.000 Protab Packages to the separate performance obligations in the contract 3. Prepare a journal entry to record sales of 90,000 Protab Packages (ignore any sales of extended warranties)

Answer 1

There are two performance obligations included in the Product P, which are given below: Delivering the product P after selling is a performance obligation. 6 months limited warranty is not a separate performance obligation in which the obligation to perform the services is not separated from the product sold. The coupon to purchase the C ProBook e-book reader is a separate performance obligation that will be utilized if the customer exercises the option. The coupon to purchase the extended warranty for one year is not a performance obligation as no benefit, such as reduced price has been offered. The extended warranty in any case will cost $70, whether the customer buys it along with the protab or afterwards. Percentage of the Stand alone sum of stand Allocation to selling price of alone selling total transaction the performance prices of the price to the obligation for performace performance 100000 units obligations obligation $ 7,69,50,000.00 95% $ 7,31,02,500.00 $ 40,50,000.00 5% $ 2,02,500.00 0 $ $ 8,10,00,000.00 $ 7,33,05,000.00 Performance obligation Sale of product P without limited warranty, coupon Coupons to purchase the probook ebook reader Coupon to purchase extended warranty Total Selling price per unit Unit sold Stand alone selling price $ 855.00 90000 $ 7,69,50,000.00 =855*90000 Selling price per unit Unit sold Stand alone selling price $ 180.00 22500 =90000*25% $ 40,50,000.00 =180*22500 Stand alone selling price per unit Unit sold Stand alone selling price - =70-70 40500 =90000*45% . =0*40500 $ $ 7,69,50,000.00 $ 40,50,000.00 Sales of product P Option to purchase Probook Option to purchase extended warranty Total sales of 100000 units $ 8,10,00,000.00 Selling price of single performance obligation Selling price of total performance obligation % of sale of Product P $ 7,69,50,000.00 $ 8,10,00,000.00 95% =76950000/81000000*100 Selling price of single performance obligation Selling price of total performance obligations % of coupon to purchase the probook $ 40,50,000.00 $ 8,10,00,000.00 5% -4050000/81000000*100 Percentage of transaction Transaction price Unit sold Total transaction price 95% 855.00 90000 $ 7,31,02,500.00 -95%*855*90000 5% $ Percentage of transaction Transaction price Unit sold Total transaction price 855.00 90000 38,47,500.00 -5%*855*90000 $ Transaction price of sale of product P $ 7,31,02,500.00 Transaction of price of coupon to purchase probook | $ 38,47,500.00 Total transaction price $ 7,69,50,000.00 Journal entries Particulars Cash $ 7,69,50,000.00 Sales revenue Deferred revenue discount option To record the sale of protab along with performance obligation $ $ 7,31,02,500.00 38,47,500.00