Alpha Solutions enters into contracts with customers to provide a perpetual software license for $10,000 and one year of post-contract support (PCS) for $1,000, for a total sales price of $11,000. The license and PCS are distinct performance obligations. The contracts include a customer option to renew PCS for an additional year for $800 (a 20% discount). Alpha Solutions concluded that the renewal option is a distinct performance obligation and represents a material right because it originally sells for $1,000. Alpha Solutions also determined that both the perpetual license and PCS were sold at stand-alone selling prices and estimated that the customer has a 70 percent probability of renewing at the end of year 1, 40 percent at the end of year 2, and zero percent at the end of year 3. After year 3, Alpha estimates there is a zero percent probability of renewing. How much of the transaction price is allocated to the renewal option for the end of year 1?
Alpha Solutions enters into contracts with customers to provide a perpetual software license for $10,000 and one year of post-contract support (PCS) for $1,000, for a total sales price of $11,000. The license and PCS are distinct performance obligations. The contracts include a customer option to renew PCS for an additional year for $800 (a 20% discount). Alpha Solutions concluded that the renewal option is a distinct performance obligation and represents a material right because it originally sells for $1,000. Alpha Solutions also determined that both the perpetual license and PCS were sold at stand-alone selling prices and estimated that the customer has a 70 percent probability of renewing at the end of year 1, 40 percent at the end of year 2, and zero percent at the end of year 3. After year 3, Alpha estimates there is a zero percent probability of renewing. How much of the transaction price is allocated to the renewal option for the end of year 1?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:5. Alpha Solutions enters into contracts with customers to provide a perpetual software license for
$10,000 and one year of post-contract support (PCS) for $1,000, for a total sales price of $11,000. The
license and PCS are distinct performance obligations. The contracts include a customer option to
renew PCS for an additional year for $800 (a 20% discount). Alpha Solutions concluded that the
renewal option is a distinct performance obligation and represents a material right because it
originally sells for $1,000. Alpha Solutions also determined that both the perpetual license and PCS
were sold at stand-alone selling prices and estimated that the customer has a 70 percent probability
of renewing at the end of year 1, 40 percent at the end of year 2, and zero percent at the end of year
3. After year 3, Alpha estimates there is a zero percent probability of renewing. How much of the
transaction price is allocated to the renewal option for the end of year 1?
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