Question

Creative Computing sells a tablet computer called the Protab. The $780 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 $200, a price that represents a 50% discount from the regular Probook price of $400. It is expected that 20% of the discount coupons will be utilized.

A coupon to purchase a one-year extended warranty for $50. Customers can buy the extended warranty for $50 at other times as well. Creative estimates that 40% 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 $760.

Required:
1. & 2. Indicated below whether each item is a separate performance obligation and allocate the transaction price of 100,000 Protab Packages to the separate performance obligations in the contract.
3. Prepare a journal entry to record sales of 100,000 Protab Packages (ignore any sales of extended warranties).

Indicated below whether each item is a separate performance obligation and allocate the transaction price of 100,000 Protab Packages to the separate performance obligations in the contract.

Item Description Performance Obligation? Stand Alone Price Percentage of Total Stand Alone Price Protab computers Yes $72,200,000 95% Limited 6-month warranty No $0 Option to purchase a Probook Yes $3,800,000 5% Option to purchase extended warranty No $0 Total stand alone price $76,000,000 100% Item Description Percentage of Total Stand Alone Price × Total Transaction Price = Allocated Contract Price Protab computers 95% × $74,100,000 = $70,395,000 Limited 6-month warranty Option to purchase a Probook 5% × $74,100,000 = $3,705,000 Option to purchase extended warranty Total contract price $74,100,000

Answer 1