Question

Problem 6-2 (Static) Performance obligations; warranties; option (LO6-2, 6-4, 6-5) Creative Computing sells a tablet computer called the Protab. The $780 sales price of a Protab Package includes the following: • One Protab computer, • A6 month limited warranty. This warranty quarantees 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 20% of the discount coupons will be utilized • A coupon to purchase a one-year extended warranty for $50. Customers can buy the extended warranty for $50 at other times as well. 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 $760. 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

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Requirement 1
There are two performance obligation:
Protab Computers
Option to purchase Extended warranty
Requirement 2
Item	Perf Obligation	Stand alone Price	% of Total
Protab Computers	Yes	$                         76,000,000	95%	$760*100,000
Limited 6 Month warranty	No	$                                           -	0%
Option to purchase Probook	Yes	$                            4,000,000	5%	($200*100,000)*20% probability
Option to purchase Extended warranty	No	$                                           -	0%
Total		$                         80,000,000
Item	% of Total	*Total Transaction Price	Allocated Contract Price
Protab Computers	95%	$                         78,000,000	$                         74,100,000
Limited 6 Month warranty	0%	$                         78,000,000	$                                           -
Option to purchase Probook	5%	$                         78,000,000	$                           3,900,000
Option to purchase Extended warranty	0%	$                         78,000,000	$                                           -
Total			$                         78,000,000
Requirement 3
Journal Entry:
Account	Debit	Credit
Cash	$      78,000,000
Sales Revenue		$                         74,100,000
Deferred Revenue-Discount Coupon		$                            3,900,000