Question

Assume the same facts as in P5-2, except that customers must pay $75 to purchase the extended warranty if they don't purchase it with the $50 coupon that was included in the Protab Package. Creative estimates that 40% of customers will use the $50 coupon to purchase an extended warranty. Complete the same requirements as in P5-2.
In P5-2
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: 3.

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 obligations in the contract, 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 option to purchase the extended warranty provides a material right to the customer, as the extended warranty costs less when purchased with the coupon that was included in the Protab Package ($50) than it does when purchased separately ($75), so it is a third performance obligation. 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 obligations in the contract, and the seller's role is not to integrate and customize them to create one product or service. So, the discount coupon qualifies as a performance obligation.

 

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 (to two decimal places):	Allocation of total transaction price to each performance obligation:
Protab tablet	$76,000,0001	93.83%4	$73,187,4007
Option to purchase Probook	4,000,0002	4.94%5	3,853,2008
Option to purchase extended warranty	1,000,0003	1.23%6	959,4009
Total	$81,000,000	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.

3$1,000,000 = ($75 price of warranty sold separately minus $50 price of warranty sold at time of software purchase) × 100,000 units sold × 40% probability of exercise of option.

4 93.83% = $76,000,000 / $81,000,000

5 4.94% = $4,000,000 / $81,000,000

6 1.23% = $1,000,000 / $81,000,000

7 $73,187,400 = 93.83% × ($780 × 100,000 units)

8 $3,853,200 = 4.94% × ($780 × 100,000 units)

9 $959,400 = 1.23% × ($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 ($800 × 100,000 units)	78,000,000
Sales revenue		73,187,400
Deferred revenue-discount option		3,853,200
Deferred revenue-extended warranty