Question

Creative Computing sells a tablet computer called the Protab. The $620 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 $125, a price that represents a 50% discount from the regular Probook price of $250. It is expected that 20% of the discount coupons will be utilized. A coupon to purchase a one-year extended warranty for $40. Customers can buy the extended warranty for $40 at other times as well. Creative estimates that 45% 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 $600. Required: 1. & 2. Indicated below whether each item is a separate performance obligation and allocate the transaction price of 120,000 Protab Packages to the separate performance obligations in the contract. 3. Prepare a journal entry to record sales of 120,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

Item description	performance obligation?	Stand alone price	percentage of total stand alone price
Protab computers	yes	72000000 (600*120000)	96% (72000000/75000000)
Limited 6-month warranty	no
Protab discount vouchers	yes	3000000 (50%*250*120000*20%)	4% (3000000/75000000)
Option to purchase a protab	no
Total stand alone price		75000000	100%

Item description	percentage of total stand alone Price	x	total transaction price	=	allocated contract price
Protab computers	96%	x	74400000 (620*120000)		71424000 (74400000*96%)
Limited 6-month warranty
protab discount vouchers	4%	x	74400000 (620*120000)		2976000 (74400000*4%)
Option to purchase a protab
Total stand alone price	100%				74400000

Part 3

Transaction	general journal	debit	credit
1	cash	74400000
	Sales Revenue		71424000
	Deferred revenue-discount option		2976000