Question

1. On March 1, 2021, Gold Examiner receives $153,000 from a local bank and promises to deliver 100 units of certified 1-oz. gold bars on a future date. The contract states that ownership passes to the bank when Gold Examiner delivers the products to Brink’s, a third-party carrier. In addition, Gold Examiner has agreed to provide a replacement shipment at no additional cost if the product is lost in transit. The stand-alone price of a gold bar is $1,463 per unit, and Gold Examiner estimates the stand-alone price of the replacement insurance service to be $77 per unit. Brink’s picked up the gold bars from Gold Examiner on March 30, and delivery to the bank occurred on April 1.

Required:
1. How many performance obligations are in this contract?
2. to 4. Prepare the journal entry Gold Examiner would record on March 1, March 30 and April 1.

2.

Clarks Inc., a shoe retailer, sells boots in different styles. In early November the company starts selling “SunBoots” to customers for $65 per pair. When a customer purchases a pair of SunBoots, Clarks also gives the customer a 30% discount coupon for any additional future purchases made in the next 30 days. Customers can’t obtain the discount coupon otherwise. Clarks anticipates that approximately 20% of customers will utilize the coupon, and that on average those customers will purchase additional goods that normally sell for $140.

Required:

1. How many performance obligations are in a contract to buy a pair of SunBoots?

2. Prepare a journal entry to record revenue for the sale of 1,000 pairs of SunBoots, assuming that Clarks uses the residual method to estimate the stand-alone selling price of SunBoots sold without the discount coupon.

Answer 1

Gold Examiner Requirement 1 Number of performance obligations in the contract: 2 Delivery of gold is one performance obligation. The additional insurance is a second performance obligation. The insurance service is capable of being distinct because the bank could choose to receive similar services from another insurance provider, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering gold, and the seller's role is not to integrate and customize them to create one service or product. So, the insurance qualifies as a performance obligation. The receipt of cash prior to delivery is not a performance obligation, but rather gives rise to deferred revenue associated with performance obligations to be satisfied in the future. Requirement 2 Journal Enteries Date Particulars 1.3.2021 Cash a/c Dr. To Deferred revenue-gold bars To Deferred revenue-insurance Debit in $ Credit in $ 153000 145350 7650 145350 30.3.2021 Deferred revenue-gold bars a/c Dr. To Sales revenue 145350 7650 1.4.2021 Deferred revenue-insurance a/c Dr. To Service revenue 7650 146300 Value of the gold bars: $1,463/unit x100 units Stand-alone selling price of the insurance: $77 x 100 units Total of stand-alone prices 7700 154000 Gold Examiner first identifies each performance obligation's share of the sum of the stand-alone selling prices of all deliverables: Gold bars: 146300 / 154000 = Insurance:7700 / 154000 = 95% 5% 100% Gold Examiner then allocates the total selling price based on stand-alone selling prices, as follows: $153,000 Transaction price x 95% = $145,350 Gold $153,000 Transaction price x 5% = $7,650 Insurance Gold Examiner recognizes only the portion of revenue associated with passing of the legal title. The revenue associated with insurance coverage will be earned only when that performance obligation is satisfied.

Clarks Inc. Requirement 1 Number of performance obligations in the contract: 2. The delivery of SunBoots is one performance obligation. The discount coupon for additional future purchases is a second performance obligation because it provides a material right to the customer that the customer would not receive otherwise. That right to receive a discount is both capable of being distinct, as it could be could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering SunBoots, and the seller's role is not to integrate and customize them to create one product. So, the discount coupon is distinct and qualifies as a performance obligation. Requirement 2 Journal Enteries Trans. Particulars Cash a/c To Sales Revenue To Deferred Revenue - discount option Dr. Debit in $ Credit in $ 65000 56600 8400 If Clarks can't estimate the stand-alone selling price of SunBoots, it will use the residual method to calculate that price as the amount of the total transaction price minus the value of the discount. Cash (1,000 x $65) = $65,000 Deferred revenue (discount option) = (1,000 pairs x $140 average purchase price x 30% discount x 20% of customers estimated to redeem coupon)