Question

1. During June 2019 Needs Business Company (NBC) runs a special offer whereby every customer who purchases a 4th of July picnic set receives a coupon for 2 dozen free gourmet hot dogs during the first week of July (presumably for use at a 4th of July picnic!). Two dozen gourmet hot dogs normally sell for $20. In a similar promotion run in October 2018 (2 free pumpkin pies during the week of Thanksgiving when a customer purchased inflatable turkey yard art in October) 65% of customers returned to the store during the week of Thanksgiving to pick up their free pies. In June 2019, NBC sold 300 4th of July picnic sets for $150 each.

a. How many performance obligations are involved in the picnic set sales in June? Justify your response.

b. What is the transaction price?

c. Determine the transaction price allocated to each performance obligation.

d. If NBC prepares financial statements monthly, what would be the timing of the recognition of revenue related to these transactions?

2. Too Nice Company (TNC) includes with the sale of its jumping bean machine, a 5-year warranty that covers all repairs and maintenance. The selling price for the jumping bean machine and the related warranty is $1,000. A competitor sells a similar machine without any warranty for $850. TNC does not sell the warranty separately nor is it aware of any company that does. TNC estimates it will cost $120 to perform warranty work on each jumping bean machine over the 5-year warranty period. TNC’s average markup on sales is 40%. In 2019, TNC sells 1,200 jumping bean machines, and incurs $22,000 total warranty cost on the 1,200 machines.

a. How many performance obligations are involved in the jumping bean machine sales in 2019? Justify your answer.

b. What is the transaction price?

c. Determine the transaction price allocated to each performance obligations.

d. How much revenue will be recognized from the above transaction in 2019?

3. What’s the Revenue (WTR) Company enters into a 6-month contract to provide consulting services related to a customer’s computer system. The customer agrees to pay $200 per hour for the services up to a maximum of $200,000. In January and February WTR performs 120 and 200 hours of service, respectively, and believes it is highly unlikely that the overall contract work will exceed 1,000 hours. During March, WTR discovered a significant error in the customer’s computer code related to the engagement, resulting in 350 hours of work during March. Based on this, WTR believes that the entire engagement will likely entail a total of 1,100 hours.

a. How much revenue will be recognized in January on this consulting engagement?

b. How much revenue will be recognized in February on this consulting engagement?

c. How much revenue will be recognized in March on this consulting engagement?

Answer 1

1. Needs Business Company (NBC)

a. There are 2 performance obligations involved in the picnic set sales in June.

1. Delivery of the picnic set.

2. Coupon for 2 dozen free gourmet hot dogs.

Both these are separate performance obligations since the delivery of the picnic set is distinct from the coupon redemption.

b. The transaction price is 300 x $150 = $45000.

c.

Performance Obligation	Standalone Price	Percent of total standalone price	Allocation of Transaction Price
Picnic set (300 x $150)	$                  45,000	92%	$                                               41,400
Coupon (300 x $20 x 65%)	$                     3,900	8%	$                                                 3,600
Total	$                  48,900	100%	$                                               45,000

Based on the past experience of the Thanksgiving promotion wherein 65% of customers returned to the store, the same estimate is considered for computing the standalone price of the free hot dogs coupons.

d. The revenue from the sale of the picnic set will be recognized at the time of delivery of the picnic set while the revenue from the coupons will be recognized at the time of redemption of the coupons by the customer.

Per HOMEWORKLIB RULES the first question has been answered. Please post each of the remaining independent questions separately. Thank you.