Question

Creative Computing sells a tablet computer called the Protab. The $740 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 $450, a price that represents a 40% discount from the regular Probook price of $750. It is expected that 20% of the discount coupons will be utilized.
• A coupon to purchase a one-year extended warranty for $65. Customers can buy the extended warranty for $90 at other times if they do not use the $65 coupon. Creative estimates that 40% 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 $720.

Required:
1. & 2. Indicate 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.

Answer 1

Solution:

1.& 2.)

Performance obligation	Stand - alone selling price of the performance obligation:	% of the sum of the stand - alone selling price of the performance obligations:	Allocation of total transactions price to each performance obligation:
Protab tablet	$72,000,000	92.3%	$68,302,000
Option to purchase probook	$6,000,000	7.7%	$5,698,000
Total	$78,000,000	100%	$74,000,000

Explanation:

$720/ unit × 100,000 units =$72,000,000

40% discount × $750 normal Probook price × 100,000 discount coupons issued × 20% probability of redemption = $6,000,000

$72,000,000/$78,000,000 =92.3%

$6,000,000/$78,000,000 =7.7%

92.3% ×($740 × 100,000 units) =$68,302,000

7.7% × ($740 × 100,000 units) =$5,698,000

3.)

Journal entry

No. of event	General Journal	Debit	Credit
1.	Protab computers ($74000,000 × 92.3%)	$68,302,000
	Probook discount vouchers ($74,000,000 × 7.7%)	$5,698,000
	Cash		$74,000,000
	( To record sales of 100,000 Protab Packages)