Question

Creative Computing sells a tablet computer called the Protab. The $970 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 $375, a price that represents a 40% discount from the regular Probook price of $625. It is expected that 20% of the discount coupons will be utilized.
• A coupon to purchase a one-year extended warranty for $60. Customers can buy the extended warranty for $95 at other times if they do not use the $60 coupon. Creative estimates that 30% 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 $950.

Required:
1. & 2. Indicate below whether each item is a separate performance obligation and allocate the transaction price of 80,000 Protab Packages to the separate performance obligations in the contract.
3. Prepare a journal entry to record sales of 80,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

1. There are 3 performance obligations included in a Protab Package.

The delivery of the Protab computer is one performance obligation, the coupon to purchase a Creative Probook e-book reader for a 40% discount is the second performance obligation, and the coupon to purchase an extended warranty at a discounted price is the third performance obligation. All the three provide a material right to the customer and are separately identifiable and capable of being sold separately and hence are separate performance obligations.

2.

Performance obligation:	Stand-alone selling price of the performance obligation:	Percentage of the sum of the stand-alone selling prices of the performance obligations: (to two decimal places)	Allocation of total transaction price to the performance obligation:
Protab computer	76000000	94.01%	72951760
Limited 6-month warranty
Coupon to purchase a Probook	4000000	4.95%	3841200
Coupon to purchase extended warranty	840000	1.04%	807040
Total $	80840000	100.00%	77600000

Protab computer = 80000 x $950 = $76000000

Coupon to purchase a Probook = 80000 x $625 x 40% x 20% = $4000000

Coupon to purchase extended warranty = 80000 x ($95 - $60) x 30% = $840000

3.

General Journal	Debit	Credit
Cash (80000 x $970)	77600000
Sales revenue		72951760
Deferred revenue		4648240
(To record the sale of Protab packages)