Question

Video Planet (“VP”) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $2,040, sells the remote separately for $120, and offers the installation service separately for $240. The entire package sells for $2,300. Required: How much revenue would be allocated to the TV, the remote, and the installation service?

Answer 1

Concepts and reason

Revenue recognition:

The date of sale is the time at which the revenue is to be recognized. According to revenue recognition principle revenue is recognized when earned regardless when cash is received and expense is recognized when incurred regardless when cash is paid.

There are some conditions on the basis of which the revenue is recognized in the books. When there is transfer of risks and rewards from the seller to the buyer then the revenue should be recognized. The control of the goods is with buyer and not seller. There is reasonable assurance that the payment for goods purchased or services availed will be made. It is required that there is reasonable measurement of the amount of revenue and the cost incurred for the goods manufactured and services provided.

Fundamentals

Allocation of revenue to products:

When the products are sold in a package then it is required to allocate the revenue to the products. In such a situation the total of the fair market value of all products is to be computed. Then percentage of the fair market value for all the products is to be computed in which the fair market value of the individual product is to be divided by the fair market value of all products. The revenue allocated to each product is to be computed by multiplying the package amount by the percentage of fair market value.

1.

Compute the percentage of the fair market value of each product.

Following schedule shows the percentage of the fair market value of each product:

Following schedule shows the calculation:

Calculate the revenue to be allocated to the products.

Following schedule shows the revenue to be allocated to the products:

The amount of revenue to be allocated to TV is $1,955, to Remote is $115 and to Installation is $230.

Following schedule shows the calculation:

Ans:

The amount of revenue to be allocated to TV is $1,955, to Remote is $115 and to Installation is $230.