Question

On March 1, 2018, Gold Examiner receives $155,000 from a local bank and promises to deliver 96 units of certified 1-oz. gold bars on a future date. The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier. In addition, Gold Examiner has agreed to provide a replacement shipment at no additional cost if the product is lost in transit. The stand-alone price of a gold bar is $1,560 per unit, and Gold Examiner estimates the stand-alone price of the replacement insurance service to be $65 per unit. Brink’s picked up the gold bars from Gold Examiner on March 30, and delivery to the bank occurred on April 1.

Required:
1. How many performance obligations are in this contract?
2. to 4. Prepare the journal entry Gold Examiner would record on March 1, March 30 and April 1.

Answer 1

Solution:

1) Number of performance obligations: 2

2) Journal entries:

Mar-01	Cash	155,000
	Deferred revenue—gold bars		148,800
	Deferred revenue—insurance		6,200
Mar-30	Deferred revenue—gold bars	148,800
	Sales revenue		148,800
Apr-01	Deferred revenue—insurance	6,200
	Service revenue		6,200

Working:

1) Delivery of gold is one performance obligation and additional insurance is a second performance obligation. Since insurance service is capable of being distinct as bank could select to receive same services from another insurance provider, and it is separately identifiable , because it is not highly interrelated with the other performance obligation of delivering gold, and the seller's role is also not to customize and integrate them to create one product or service. Thus, the insurance qualifies as a performance obligation. The receipt of cash prior to delivery will not be categorised as performance obligation, however will increase to deferred revenue associated with performance obligations to be satisfied in the future

2)

Value of the gold bars ( 1560 * 96 units)	149760
Stand­alone selling price of the insurance (65 * 96 units)	6240
Total of stand­alone prices	156000

Gold bars: 149,760 / 156,000 = 96%

Insurance: 6240 / 156,000 = 4%

155,000 Transaction price * 96% = $148,800

155,000 Transaction price * 4% = $6,200