Question

Creative Computing sells a tablet computer called the Protab. The $890 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 $145, a price that represents a 50% discount from the regular Probook price of $290. It is expected that 25% of the discount coupons will be utilized. A coupon to purchase a one-year extended warranty for $65. Customers can buy the extended warranty for $65 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 $870. 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 96,000 Protab Packages to the separate performance obligations in the contract.

3. Prepare a journal entry to record sales of 96,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

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Item	Perf Obligation	Stand alone Price	% of Total
Protab Computers	Yes	$                        83,520,000	96.0%	870*96000
Limited 6 Month warranty	No	$                                          -	0.0%
Option to purchase Probook	Yes	$                           3,480,000	4.0%	(145*96000)*25%
Option to purchase Extended warranty	No	$                                          -	0.0%
Total		$                        87,000,000
Item	% of Total	*Total Transaction Price	Allocated Contract Price
Protab Computers	96%	$                        85,440,000	$                         82,022,400
Limited 6 Month warranty	0%	$                        85,440,000	$                                           -
Option to purchase Probook	4%	$                        85,440,000	$                           3,417,600
Option to purchase Extended warranty	0%	$                        85,440,000	$                                           -
Total			$                         85,440,000
Journal Entry:
Account	Debit	Credit
Cash	$      85,440,000
Sales Revenue		$                        82,022,400
Deferred Revenue-Discount Coupon		$                           3,417,600