Question

Creative Computing sells a tablet computer called the Protab. The $970 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 $375, a price that represents a 40% discount from the regular Probook price of $625. It is expected that 20% 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 $95 at other times if they do not use the $60 coupon. Creative estimates that 30% 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 $950.

Required:
1. & 2. Indicate below whether each item is a separate performance obligation and allocate the transaction price of 80,000 Protab Packages to the separate performance obligations in the contract.
3. Prepare a journal entry to record sales of 80,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

QUES 1 & 2
Item descritpion	Performance obligation		Stand alone price		Percentage of total stand alone price
Protab computers	Yes		76000000		95%
Limited 6-month warranty	No
Probook discount vouchers	Yes		4000000		5%
option to purchase probook	No
total stand alone price			80000000		100%
	Percentage of total stand alone price	x	Total transaction price	=	Allocated contract price
Protab computers	95%	x	77600000	=	69840000
Limited 6-month warranty
Probook discount vouchers	5%	x	77600000	=	7760000
option to purchase probook
total contract price					77600000
Ques 3
Journal entry
Cash	77600000
sales revenue			69840000
deferred revenue-discount option			7760000
Number of performance obligations in the contract: 2. a)Delivery of a Protab computer is one performance obligation. b)The option to purchase a Probook at a 40% discount is a second performance obligation because it provides a material right to the customer that the customer would not receive otherwise. The option is capable of being distinct because it could be sold or provided separately, and it is distinct in the context of the contract, as it is not highly interrelated with the other performance obligation of delivering a Protab computer, and the seller’s role is not to integrate and customize them to create one product. So, the discount coupon qualifies as a separate performance obligation. c)The 6-month quality assurance warranty is not a separate performance obligation. It is not sold separately and is simply a cost to assure that the product is of good quality. The seller will estimate and recognize an expense and related contingent warranty liability in the period of sale. d)The coupon providing an option to purchase an extended warranty does not provide a material right to the customer because the extended warranty costs the same whether or not it is purchased along with the Protab. Therefore, that option does not constitute a performance obligation within the contract to purchase a Protab package

Working

Notes:
1)950 * 80000 protab=		76,000,000
2)40% discount * $625 probook*80000 coupons *20% probabiltiy of redemption							4,000,000
3)970 * 80000 protab=		77600000
4)760/800=95%
5)40/800=5%