Question

Creative Computing sells a tablet computer called the Protab. The $785 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 $425, a price that represents a 50% discount from the regular Probook price of $850. It is expected that 20% of the discount coupons will be utilized.
• A coupon to purchase a one-year extended warranty for $55. Customers can buy the extended warranty for $55 at other times as well. Creative estimates that 45% 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 $765.

All Protab sales are made in cash.

Required:
1. & 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.
3. Prepare a journal entry to record sales of 100,000 Protab Packages (ignore any sales of extended warranties).

Answer 1

As per IFRS 15, If, in a contract, an entity grants a customer the option to acquire additional goods or
services, that option gives rise to a performance obligation in the contract only if the option provides a material right
to the customer that it would not receive without entering into that contract.

As there is contractual obligation on the entity to give discount on purchase on Protab - Revenue has to be allocated based on the performance obligation. Revenue has to be recognised only when the transfer of control happens. So revenue pertaining to probook will be deferred.

In the given question it is stated that -

For purchase of 1 Protab - below mentioned are given at a discounted rate.

1. 6 months limited warranty - 100% discount on warranty - Price allocation is not necessary.

2. Coupon to purchase a pro ebook for $ 425- i.e a discount of 50% $ 425 is given

3. a coupon to purchase a extended warranty at $ 55. As the warranty coupon price can be purchased at the other times there is no benefit or added incentives is given for this warranty. So it is not included in the Calculation of Price allocation.

Item Description	Performance Obligation?	Standalone price (SP)	Price for 100,000 (Inclusive of discount)	Percentage of Total Stand Alone Price	Remarks
Protab computers	yes	765	76,500,000	64%	SP * 100,000
Limited 6-month warranty	No	0	-
Option to purchase a Probook	yes	850	42,500,000	36%	SP*100,000*50% discount
Option to purchase extended warranty	No	0
Total stand alone price			119,000,000
Total Transaction price (TP)	78,500,000	(785$ * 100,000 units)
Item Description	Percentage of Total Stand Alone Price	Allocated Contract Price	Remarks
Protab computers	64%	50,464,286	TP * 64%
Limited 6-month warranty	0%	-
Option to purchase a Probook	36%	28,035,714	TP * 36%
Option to purchase extended warranty	0%	-
Total contract price		78,500,000

Journal Entry:

Bank Account / Cash Ac Dr - 78,500,000

To Protab Sales - 50,464,286

To Deferred revenue - 28,035,714

The revenue relating to probook has to be deferred until the customer the buys it.