Question

Creative Computing sells a tablet computer called the Protab. The $875 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 $225, a price that represents a 50% discount from the regular Probook price of $450. It is expected that 20% of the discount coupons will be utilized. • A coupon to purchase a one-year extended warranty for $40. Customers can buy the extended warranty for $40 at other times as well. 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 $855. 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

Req 1) Standalone price $ 85,500,000 Percentage of Total Stand Alone price 95.00% Item Description Protab computer Limited 6-month warranty Option to purchase a Probook Option to purchase extended warranty Total Standalone price Performance Obligation? Yes No Yes No 4,500,000 5.00% $ 90,000,000 Working notes Calculation of standalone price Protab packages sold Standalone price of protab computer Total Standalone price of protab sold (100,000 $ 855) 100,000 855 $ $ 85,500,000 Protab package sold Discounted price of probook % of coupon utilized Standalone price of probook (100,000 $ 225 x 20%) 100,000 225 20% 4,500,000 $ $ Calculation of Percentage of total standalone price Total Standalone price % of Protab table (85,500,000 / 90,000,000) % of Probook (4,500,000 / 90,000,000) 90,000,000 95.00% 5.00%

Req 2) Percentage of Total Stand Alone Total Transaction price x price = Allocated Contract price 95.00% X $ 87,500,000 = $ 83,125,000 Item Description Protab computer Limited 6-month warranty Option to purchase a Probook Option to purchase extended warranty Total Contract price 5.00% $ 87,500,000 = $ 4,375,000 $ 87,500,000 Working Notes Calculation of total transaction price Protab package sold Sale price of protab packages Total Transaction price (100,000 $ 875) 100,000 875 $ $ 87,500,000

Req 3) No 1) Credit Debit 87,500,000 Transaction General Journal 1) Cash Sales revenue Deferred revenue - discount option |(to record sale of protab packages) 83,125,000 4,375,000