Question

Question 3  (20 marks)

Computers Inc. sells personal computers as well as home Internet service. On July 1, 2018, Computers sold a computer with a two-year Internet connection service contract and a two-year extended warranty on the computer.  The customer paid $2,000 cash for this special offer. Each component could have been purchased separately by the customer so three performance obligations have been identified.

The stand-alone selling price of the computer is $1000 (cost to Computers Inc. $580). The stand-alone value of the two -year Internet service is $1,400 and the extended warranty is $100 (if purchased and paid for today).  

Assume the costs to provide the Internet and extended warranty are incurred fairly evenly throughout the three-year period. The customer takes the computer home on July 1, 2018.

Computers Inc. has a December 31 year end and prepares financial statements annually.  

Required:

1. How much of the $2000 revenue will be recorded in each year (2018 through to 2020)?  Show all calculations and label all amounts.

(b)    Prepare all of the journal entries to record the above transaction for 2018 and 2019.

Answer 1

	Individual Price	Allocated Price		Recognition period	Service period (months)	Months in year 1	Revenue for 2018	Revenue for 2019	Revenue for 2020
Computer	1,000	800	1000*2000/2500	Year 1			800	-	0
Internet service	1,400	1,120	1400*2000/2500	Year 1-3	24	6	280.00	560.00	280.00
Warranty service	100	80	100*2000/2500	Year 1-3	24	6	20.00	40.00	20.00
	2,500	2,000					1,100	600	300
Journal Entries
2018	Bank a/c        Dr	2,000
	To Cost of computer		580
	To Gain on sale		220
	To revenue for internet service		280
	To revenue for warrenty service		20
	To Deferred revenue for internet service		840
	To Deferred revenue for warreny service		60
	(Being Computer sold with 2 year internet and warrenty service)
2019	Deferred revenue for internet service   Dr	560
	Deferred revenue for warreny service    Dr	40
	To revenue for internet service		560
	To revenue for warrenty service		40
	(being deferred revenue recognized)
2020	Deferred revenue for internet service   Dr	280
	Deferred revenue for warranty service    Dr	20
	To revenue for internet service		280
	To revenue for warrenty service		20
	(being deferred revenue recognized)