Question

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only		$800
Oven with installation service		850
Oven with maintenance services		970
Oven with installation and maintenance services		990

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $170. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800.

Assume that a customer purchases an oven with both installation and maintenance services for $990. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct).

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract. (Do not round intermediate calculations. Round final answers to 2 decimal places.)

Oven		$enter a dollar amount rounded to 2 decimal places
Installation		$enter a dollar amount rounded to 2 decimal places
Maintenance		$enter a dollar amount rounded to 2 decimal places

show work and explain

Answer 1

As the accounting standard, revenue should be recognized based on the 5 step model

1. Identifying the contract with the customer

2. Identifying performance obligations with the contract

3. Determining the transaction price

4. Allocating the transaction price to the performance obligations in the contract

5. Recognizing revenue when the performance obligations are satisfied

Performance obligation is nothing but the distinct good or service promised to transfer or render as per the agreed contract

It is given in the question that all the 3 components are distinct. Hence, it can be taken that there are 3 performance obligations within the same contract with the customer. They are as follows

1. Oven

2. Installation service

3. Maintenance

The transaction price, revenue can be allocated based on the standalone prices of the each component

Standalone prices of each component are

Particulars	Calculation	Standalone price
Oven		800
Maintenance		170
Installation	850 - 800 Oven with installation service - Oven only	50
Total		1,020

                Allocation of revenue to each component based on relative standalone prices

Particulars	Oven	Maintenance	Installation	Total
Standalone prices (above table)	800	170	80	1,050
Revenue for each component	755 (990* 800/1050)	160 (990* 170/1050)	75 (990* 80/1050)	990