Answer:
Part a
Allocation based on Stand Alone Selling Prices :
- 4 - door Sedan and the 3 years maintenance contract = $6,400
- Cash incentive = $100
Part b
Journal entry :
Debit : Cash $130,000
Credit : Revenue - 4 - door Sedan $128,000
Credit : Revenue - Cash incentive $2,000
Explanation:
It is important to identify the step in IFRS 15 - Revenue from Contracts with Customers, which is affected by the question.
Here, Step 2 - Identify the performance obligation in the contract, Step 3 - Determine the Transaction Price, Step 4 - Allocate the Transaction Price to the Performance obligation and Step 5 - Recognize the Revenue as or when the Performance Obligation is Satisfied. These are explained and applied as follows :
<u>Step 2 - Identify the performance obligation in the contract.</u>
Here, identify the individual promises (Performance Obligations) that the entity has committed to transfer to the customer.
Also the entity identifies each performance obligation that is distinct, or a series of distinct Goods or Services that are substantially the same and have the same pattern of transfer to the customer.
So, the performance obligations are as follows :
- 4 - door Sedan and the 3 years maintenance contract(these can not be consumed independently from one another)
- Cash incentive (can be consumed independently from the rest of the performance obligations)
<u>Step 3 - Determine the Transaction Price</u>
Transaction price is the consideration the entity expects to be entitled to in exchange of goods or services transferred to the customer.
Transaction Price is $6,500 ($6,000 + $400 + $100)
<u>Step 4 - Allocate the Transaction Price to the Performance obligation</u>
Allocation of Transaction Price is done based on Stand Alone Selling Prices.
Stand alone selling prices have already been identified :
- 4 - door Sedan and the 3 years maintenance contract = $6,400
- Cash incentive = $100
<u>Step 5 - Recognize the Revenue as or when the Performance Obligation is Satisfied</u>
Stand alone for 20 vehicles :
- 4 - door Sedan and the 3 years maintenance contract = $6,400 x 20 = $128,000
- Cash incentive = $100 x 20 = $2,000
Journal entry :
Debit : Cash $130,000
Credit : Revenue - 4 - door Sedan $128,000
Credit : Revenue - Cash incentive $2,000
