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 (or $50. Customers can buy the extended warranty (or $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 estimate; that if it did so, a Protab alone would sell for $760.
Required:
1. How many performance obligations are included in a Protab Package? Explain your answer.
2. List the performance obligations in the Protab Package in the following table, and complete it to allocate the transaction price of 100,000 Protab Packages to the performance obligations in the contract.

3. Prepare a journal entry to record sales of 100,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

Requirement 1

Number of performance obligations in the contract: 2.

Delivery of a Protab computer is one performance obligation.

The option to purchase a Probook at a 50% discount is a second performance obligation because it provides a material right to the customer that the customer would not receive otherwise. The option is capable of being distinct because it could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering a Protab computer, and the seller's role is not to integrate and customize them to create one product. So, the discount coupon qualifies as a performance obligation.

The 6-monthquality assurance warranty is not a performance obligation. It is not sold separately and is simply a cost to assure that the product is of good quality. The seller will estimate and recognize an expense and related contingent warranty liability in the period of sale. Accounting for warranties is covered in Chapter 13.

The coupon providing anoption to purchase an extended warranty does not provide a material right to the customer because the extended warranty costs the same whether or not it is purchased along with the Protab. Therefore, that option does not constitute a performance obligation within the contract to purchase a Protab package.

 

Requirement 2

Allocation of purchase price to performance obligations:

Performance obligation:	Stand-alone selling price of the performance obligation:	Percentage of the sum of the stand-alone selling prices of the performance obligations:	Allocation of total transaction price to each performance obligation:
Protab tablet	$76,000,0001	95%3	$74,100,0005
Option to purchase a Probook	4,000,0002	5%4	3,900,0006
Total	$80,000,000	100.00%	$78,000,000

 

1$76,000,000 = $760/unit× 100,000 units.

2$4,000,000 = 50% discount × $400 normal Probook price× 100,000 discount coupons issued × 20% probability of redemption.

395% = $76,000,000 / $80,000,000

4 5% = $4,000,000 / $80,000,000

5 $74,100,000 = 95.00% × ($780 × 100,000 units)

6 $3,900,000 = 5.00% × ($780 × 100,000 units)

 

Requirement 3

Creative then allocates the total selling price based on stand-alone selling prices, as follows:

 

The journal entry to record the sale is:

Cash ($780 × 100,000 units)	78,000,000
Sales revenue		74,100,000
Deferred revenue-discount option		3,900,000