Question

Clarks Inc., a shoe retailer, sells boots in different styles. In early November the company starts selling “SunBoots” to customers for $70 per pair. When a customer purchases a pair of SunBoots, Clarks also gives the customer a 20% discount coupon for any additional future purchases made in the next 30 days. Customers can’t obtain the discount coupon otherwise. Clarks anticipates that approximately 10% of customers will utilize the coupon, and that on average those customers will purchase additional goods that normally sell for $300.

Required:

1.	How many performance obligations are in a contract to buy a pair of SunBoots?

      

2.	Prepare a journal entry to record revenue for the sale of 1,200 pairs of SunBoots, assuming that Clarks uses the residual method to estimate the stand-alone selling price of SunBoots sold without the discount coupon. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

SOLUTION

1. Number of performance obligation is two-

a. Delivery of sun boots

b. Discount coupon for additional purchases.

2, Journal entry-

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
	Cash (1,200*$70)	84,000
	Service revenue		76,800
	Deferred revenue		7,200
	(To record service performed)

Deferred revenue = (Number of pairs * Average purchase price) * Discount * Estimated coupon

= (1,200 * $300) * 20% * 10% = 7,200