Question

Creative Computing sells a tablet computer called the Protab. The $740 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 $150, a price that represents a 50% discount from the regular Probook price of $300. It is expected that 20% of the discount coupons will be utilized. A coupon to purchase a one-year extended warranty for $70. Customers can buy the extended warranty for $70 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 $720. All Protab sales are made in cash. 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).

Answer 1

Answer:

Explanation:

1. Package of $740 sales price includes :

Protab Computer - 1

Limited warranty for 6 month

Coupon to purchase e-book for $150 (represents 50% discount) expected 20% utilized

Coupon to purchase 1-year warranty for $70 regular price $70 expected 40% purchase

Protab Computer price alone is $720.

2.  

Performance    Stand along          Percentage of the    Allocation of total

Obligation         selling price        sum of the stand     transactions price to

                   of the performance  alone selling price    each performance

                     obligation                of the performance   obligation.

                                                      obligation

Protab -   $72000000                      96%                          $71040000

tablet

Open to   $3000000                         4%                           $2960000

purchase

Probook

Option to

purchase      $0                                 0 .00%                               -

extended

warranty

Total;         $75,000,000              100.00%                       $74,000,000

Protab Selling Price = 100000 units × $720 = $72,000,000

Selling price of option to purchase probook = 100000 units × 20% utilisation * $150 = $3000000

Selling price of option to purchase extended warranty = ($70 -$70)×100000 units * 40% = $0

Total = $75,000,000

Percentage of Protab selling price of Total Selling Price = $72,000,000 /$75,000,000 = 96%

Percentage of Option to purchase Probook of Total Selling Price = $3,000,000 /$75,000,000 = 4%

Percentage of Option to purchase extended warranty of Total Selling Price = 0 .00%

Total Transaction Price = 100000 units × $740 = $74,000,000

Allocation of Total Transaction price to Protab = $74,000,000 * 96% = $71040000

Allocation of Total Transaction price to Option to purchase probook = $74,000,000 * 10% = $2960000

3.

Journal Entry

Account Title                         Debit                                Credit

Cash                                  $74,000,000  

Sales Revenue                                                          $71040000

Deffered Revenue - discount option                       $2960000