Problem 5-2 Performance obligations; warranties; option [LO5-2, 5-4, 5-5]
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Problem 5-2 Performance obligations; warranties; option [LO5-2, 5-4, 5-5]
Creative Computing sells a tablet computer called the Protab. The $780 sales price of a Protab Package includes the following:
- One Protab computer.
- A 6month 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 ebook 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 oneyear extended warranty for $45. Customers can buy the extended warranty for $45 at other times as well. Creative estimates that 35% 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 $760.
Required:
- & 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.
| Item Description | Performance | Stand Alone Price | Percentage of Total | |||||
| Obligation? | Stand Alone Price | |||||||
| Protab computers | Yes | $ | 780 | 45% | ||||
| Limited 6month warranty | No | |||||||
| Probook discount vouchers | Yes | $ | 200 | 11% | ||||
| Option to purchase a Probook | No | $ | 760 | 44% | ||||
| Total stand alone price | $ | 1,740 | 100% | |||||
| Percentage of | Total Transaction | Allocated Contract | ||||||
| Item Description | Total Stand | × | = | |||||
| Alone Price | Price | Price | ||||||
| Protab computers | 45% | × | $ | 780 | = | $ | 350 | |
| Limited 6month warranty | ||||||||
| Probook discount vouchers | 11% | × | $ | 780 | = | $ | 90 | |
| Option to purchase a Probook | 44% | × | $ | 780 | = | $ | 341 | |
| Total contract price | $ | 781 | ||||||
- Prepare a journal entry to record sales of 100,000 Protab Packages (ignore any sales of extended warranties). (If no entry is required for a transaction/event, select “No journal entry required” in the first account field.)
tp://ezto.mheducation.com/hm.tpx 1/2
| 4/22/2016 | Week Three Homework | |||||
| view transaction list | view general journal | |||||
| Transaction | General Journal | Debit | Credit | |||
| 1 | Cash | 78,000,000 | ||||
| Deferred revenue discount option | 2,000,000 | |||||
| Sales revenue | 76,000,000 | |||||
ning Objective: 0504 Allocate a contract’s transaction price to multiple performance obligations.
Learning Objective: 0505 Determine whether a contract exists, and whether some frequently encountered features of contracts qualify as performance obligations.
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