In: Accounting
Creative Computing sells a tablet computer called the Protab. The $920 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 $400, a price that represents a 50% discount from the regular Probook price of $800. It is expected that 25% of the discount coupons will be utilized. A coupon to purchase a one-year extended warranty for $60. Customers can buy the extended warranty for $60 at other times as well. Creative estimates that 35% 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 $900. 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 :
As per IFRS 15 Recognising revenue from contract with customers , specifies the Revenue should be allocated to each performance obligation.
Here the Number of performance obligation are 2 Those are as follows
1. Delivery of a Protab Computer is the first Performance obligation
2. Coupon to purchase Creative Probook e book @ 50% Discount is the second performance Obligation, because here Customer has Right to Material at discounted price, that the customer would not have otherwise.
also The 6-Month Extended Warranty is not a separate performance Obligation, since it is not sold separately and is simply to assure that the product is of Good Quality. The Seller should estimate and recognise an expense and related contingent warrant liability in the period of sale.
Now Allocation of purchase price to performance obligations
Performance Obligations | Note No | Stand-alone selling price of Performance Obligation | Percentage of Sales Value | Allocation of Transaction price to each Performance Obligation |
Protab Tablet | 1 | $ 81,000,000 | 90% | $ 74,520,000 |
Option to purchase Protab E book | 2 | $ 9,000,000 | 10% | $ 8,280,000 |
Total | $ 90,000,000 | $ 82,800,000 |
Independent value excluding discounts and Offer | Total independent value | Percentage | Allocation | Sales Value | ||
Note -1 | $900*90000 Units | $ 81,000,000 | 90% | $81,000,000/$90,000,000 | $ 74,520,000 | |
Note -2 | $400*90000*25% | $ 9,000,000 | 10% | $9,000,000/$90,000,000 | $ 8,280,000 | |
$ 90,000,000 | Total Sales Value | $ 82,800,000 | $920*90,00 |
The Total Transaction price should be allocated in the percentages of independent value.
Since the Extended Warranty is not a separate Performance Obligation Hence no price is allocated.
There for the Journal Entry is as Follows
No | Transaction | General Journal | Debit | Credit |
1 | 1 | Cash A/c Dr | $ 82,800,000 | |
To Sales Revenue | $74,520,000 | |||
To Deferred Revenue -Discount Option | $ 8,280,000 |