Question

Antonio’s Car Services provides maintenance services for motorized vehicles. In March 2018, Rick placed an order for a new set of tires for $350. When a customer purchases goods or services in excess of $300, Antonio’s gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio’s estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods or services that typically sell for $75.

Required:
(a) How many performance obligations are in Rick’s contract?
(b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio’s uses the residual method to estimate the stand-alone selling price of new tires sold without the discount coupon.

Answer 1

Fact of the case
In $
Particulars	Discount obligation
Discount coupon avail by 100% customer	25%
Discount coupon avail by 80% customer (25% *80/100)	20%
Customer average expected purchase in next 3 months	75
Rick's contract price	350
Threshold for coupon entitlement	300

Expainations

1. It is observed from the fact of the case that discount is on sale of goods or services, hence it shall be considered as trade discount

Ans(a)	Performance obligation in Rick's contract
		In $
	Coupon value (350*.25*.8)	70
Ans(b)	Journal enteries for recording the revenue	Debit	Credit
1	Cash/Bank	350
	To sale		350
	(being sale made Rick)
2	Sale	350
	To profit and loss A/C		350
	(Being revenue recorded)
3	Discount on sale	70
	To Unrealized Coupon obligation		70
	(being discount coupon obligation created)
4	Unrealized Coupon obligation	70
	To Inventories A/C		70
	(being coupon realized by customer in 3 months)