Question

Exercise 6-6 (Algo) Performance obligations; customer option for additional goods or services [LO6-2, 6- 4, 6-5) Clarks Inc. a shoe retailer, sells boots in different styles. In early November the company starts selling "SunBoots" to customers for S70 per pair When a customer purchases a pair of SunBoots, Clarks also gives the customer a 30% discount coupon for any additional future purchases made in the next 30 days. Customers can't obtain the discount coupon otherwise. Clarks anticipates that approximately 20% of customers will utilize the coupon, and that on average those customers will purchase additional goods that normally sell for $100 Required: 1. How many performance obligations are in a contract to buy a pair of SunBoots? 2. Prepare a journal entry to record revenue for the sale of 1.400 pairs of SunBoots, assuming that Clarks uses the residual method to estimate the stand-alone selling price of SunBoots sold without the discount coupon

Answer 1

1.

The delivery of Sunboots is one performance obligation. Further, the discount coupon for additional future purchases would be second obligation as it provides material right to the customer that the customer would not receive otherwise. Such right of discount is distinct and separately identifiable. This is also not related to performance of delivery. So, the discount coupon is distinct and qualifies as performance obligation.

Number of performance obligations in the contract = 2

2.

If Clarks cannot estimate selling price on standalone wise, the residual approach would be to compute selling price as total transaction price minus value of discount.

Cash = 1400 X 70 = 98,000

Deferred revenue = 1400 X 100 X 30% discount X 20% = $ 8400 i.e. discount option

The journal entry would be:

Date	Particulars	Debit ($)	Credit ($)
	Cash	98000
	Sales revenue		89600
	Deferred revenue		8400
	( To record sales)

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