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 $50. Customers can buy the extended warranty for $85 at other times if they do not use the $50 coupon, 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 $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

Answer 1

Answer:

1 & 2)

The completed tables are provided as below:

Item Description	Performance Obligation?	Stand Alone Price	Percentage of Total Stand Alone Price
Protab Computers	Yes	$76,000,000 (80,000*950)	93% (76,000,000/82,000,000*100)
Limited-6 Month Warranty	No	0
Probook Discount Vouchers	Yes	$6,000,000 (80,000*375*20%)	7% (6,000,000/82,000,000*100)
Option to Purchase a Probook	No	0
Total Stand alone Price		$82,000,000	100%

____

Item Description	Percentage of Total Stand Alone Price		Total Transaction Price	Allocated Contract Price
Protab Computers	93%	X	$77,600,000 (80,000*970)	$72,168,000
Limited-6 Month Warranty
Probook Discount Vouchers	7%	X	$77,600,000 (80,000*970)	$5,432,000
Option to Purchase a Probook
Total Contract Price				$77,600,000

____

3)

The journal entry is provided as below:

Account Titles	Debit	Credit
Cash	$77,600,000
Sales Revenue		$72,168,000
Deferred Revenue - Discount Option		$5,432,000