Question

The Tomato Example Part 2:

On November 1, 2014 Tomato sells 1,000 FertPhones to consumers for $800 each. These FertPhones have no service contract. Tomato estimates that 60% of the sales price is attributable to the phones hardware and that the software will be used for two years on average. The customers have the right to return the phones within 30 days for a full refund. Each phone comes with a 12 month warranty against defects in manufacturing. In addition, each of these customers purchased a $100 TomatoCare warranty that protects the customer from damage to the phone including cracked screens and water damage. Each customer that buys a FertPhone receives a coupon to purchase a FertPad, a tablet, for $50 less than the normal price. It is expected that 35% of these coupons will be redeemed before they expire at the end of 2015. By the end of 2014, 200 coupons are redeemed with an additional 100 redeemed during 2015.

1. Identify the contract with a customer.

2. Identify the performance obligation(s) in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to each performance obligation.

5. Recognize revenue when (or as) each performance obligation is satisfied.

Record the journal entry for the sale on November 1, 2014:

Record the journal entry on December 31, 2014:

Record the journal entry on December 31, 2015:

Record the journal entry on December 31, 2016:

Answer 1

1. There are two contracts in this case: 1.Contract is to sell FertPhones to customer 2. Provide TomatoCare warranty

2. Performance Obiligation

Contract 1 - Delivery of Fertphones (No seperate obligation for warranty since it is an assurance warranty)

Contract 2 - Warranty that protects the customer from damage to the phone including cracked screens and water damage.

3. Transaction Price: Fertphones - $800 and TomatoCare warranty - $100

4. Obligation 1 - Delivery of Fertphones - $782.5 (800-(50*35%))

Obligation 2 - Warranty that protects the customer from damage to the phone including cracked screens and water damage - $100

5.

Date	Particulars	Debit	Credit
Nov 1, 2014	Sale of FertPhones		$ 7,82,500
	Accounts receivable	$ 9,00,000
	Sale of TomatoCare warranty		$       8,333
	Deferred revenue		$     91,667
	Customer liability to redeem coupon		$     17,500

Note: Expected sales returns is not adjusted to revenue since expected rate of return is not provided.