Question

Alpha Solutionsenters into separate contracts with customers to provide a perpetual software license for $10,000 and one year of post-contract support (PCS)for $1,000. The license and PCS are distinct performance obligations. The contracts include a customer option to renew PCS for an additional year for $600 (a 40% discount). Alpha Solutionsconcluded that the renewal option is a distinct performance obligation and represents a material right because it originally sells for $1,000.Alpha Solutions also determined that both the perpetual license and PCS were sold at stand-alone selling prices and estimated that the customer has an80percent probability of renewing at the end of year 1, 50 percent at the end of year 2, and zero percent at the end of year 3. After year 3, Alpha estimates there is a zero percent probability of renewing. How much of the transaction price is allocated to the renewal option for the end of year 1?

Answer 1