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 $200, a price that represents a 50% discount from the regular Probook price of $400. It is expected that 25% of the discount coupons will be utilized. A coupon to purchase a one-year extended warranty for $70. Customers can buy the extended warranty for $70 at other times as well. 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. 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 90,000 Protab Packages to the separate performance obligations in the contract. 3. Prepare a journal entry to record sales of 90,000 Protab Packages (ignore any sales of extended warranties). Complete this question by entering your answers in the tabs below. Req 1 and 2 Req3

Answer 1

Requirement 1

There are 2 performance obligations in the contract. Delivery of protab is performance obligation.

The second obligation would be option to buy protab at 40% discount as it provides material right to customers to make the purchase. It is distinct as it is capable of being sold separately. It is also not directly related to other performance obligations. Hence, discount option also applies as performance obligation in its own merit.

6-month quality assurance is not performance obligation as it is not distinct and not capable of being sold independently.

The option to purchase extended warranty is not performance obligation because it costs less than when purchased with coupon. It is also not distinct and can’t be sold separately

Items	Performance obligation	Stand Alone Price	Percentage
Protab computers	Yes	85,500,000	95%
6-month warranty	No
Option to purchase ProBook	Yes	4500,000	5%
Option to purchase limited warranty	No
Total Stand-Alone price		90,000,000	100%

Requirement 2

Performance obligation	Standalone selling price	Percentage of sum of the standalone selling prices	Allocation of total transaction price to each performance obligation
Protab tablet	85,500,000	95%	82,935,000
	950*90,000	85,500,000/900,000	970*90,000*95%
Option to purchase protab	4500,000	5%	4,365,000
	90,000 *50% * 400*25%
Option to purchase extended warranty	NIL	NIL	NIL
Total	90,000,000	100	87300,000*

*970*90,000

Items	Percentage of total stand alone price	Total transaction price	Allocated contract price
Protab computers	95%	87300,000	82,935,000
6-month warranty
Option to purchase ProBook	5%	87300,000	4,365,000
Option to purchase limited warranty
Total Stand-Alone price	100%	87300,000	87300,000

Requirement 3

Cash	87300,000
Sales revenue		82,935,000
Deferred revenue- coupon		4,365,000
(To record sales of protab packages)