Chapter 5, Problem 5.1P

(1), (a)

To determine

Performance obligation:

Performance obligation is the promise made by the seller to supply the goods and service to the customer on or before the contract.

Transaction price:

Transaction price refers to the price that is paid at the time of delivery or after delivery of goods and/or services. Specific situations affecting the transaction price are as follows:

• Variable amount of consideration and the restriction on its recognition.
• Rights for sales return
• Whether the seller is acting as a principle or an agent
• Time value of money
• Payments by the seller to the customer

Deferred revenues:

Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. For the portion of rendered services or delivered goods, revenues would be recognized by way of passing an adjusting entry. Unearned revenue is also known as deferred revenues, because at the receiving of payment in advance, revenues are not recognized but deferred until they are earned.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To determine: The number of performance obligations exist in the new member deal.

Answer to Problem 5.1P

Number of performance obligation in the contract is two, they are as follows:

1. 1) Unlimited access of facilities and classes
2. 2) Special discount coupon

Explanation of Solution

F&S offers new membership plan for unlimited access, and addition with 25% off yoga classes. Hence, access of facility and classes is first performance obligation, and additional yoga class is second performance obligation.

Conclusion

Therefore, the number of performance obligation in the new membership for access facility is two.

(1), (b)

To determine

The amount of contract price allocated to each performance obligation.

Answer to Problem 5.1P

Selling price of yoga coupon

Given,

Transaction price is $700 and

Calculated discount percentageis 4% (3)

Now, calculate the sellingprice of yoga coupon:

$\begin{array}{c}\text{Selling price of yoga coupon}=\left(\begin{array}{l}\text{Transaction price }\\ \times \text{ Yoga coupon percentage }\end{array}\right)\\ =\$700\times 4\%\\ =\$28\end{array}$

Hence, the calculated selling price of yoga coupon is $28.

Selling price of gym

Given,

Transaction price is $700 and

Calculated gym percentageis 96% (4)

Now, calculate the sellingprice of gym:

$\begin{array}{c}\text{Selling price of gym =}\left(\begin{array}{l}\text{Transaction price }\\ \times \text{ Gym percentage }\end{array}\right)\\ =\$700\times 96\%\\ =\$672\end{array}$

Hence, the calculated selling price of gym is $672.

Explanation of Solution

Working note:

1. Calculate the value of stand-alone selling price of yoga coupon

Given,

The value of the discount is $75 $\left(\$500\times 15\%\right)$

Estimated redemption is 40%.

Calculation of the stand-alone selling price of discount:

$\begin{array}{c}\begin{array}{l}\text{Stand-alone selling }\\ \text{price of yoga coupon}\end{array}\}\text{=}\left(\begin{array}{l}\text{Value of the discount }\\ \times \text{Estimated redemption}\end{array}\right)\\ \text{=}\$75\times 40\%\\ =\$30\end{array}$ (1)

2. Calculate the value of total stand-alone price:

Given,

Stand-alone selling price of gym is $720

Stand-alone selling price of discount is $30

Calculation of the total stand-alone price:

$\begin{array}{c}\begin{array}{l}\text{Total stand-alone }\\ \text{price }\end{array}\}\text{=}\left(\begin{array}{l}\text{Stand-alone selling price of gym }\\ \text{+ Stand-alone selling price of yoga coupon}\end{array}\right)\\ \text{=}\$720+\$30\\ \text{=\$750}\end{array}$ (2)

3. Calculate the yoga coupon percentage:

Given,

The calculated stand-alone selling price of yoga coupon is $30 (1)

Stand-alone selling price of gym is $720

Calculation of the yoga coupon percentage:

$\begin{array}{c}\text{Yoga coupon percentage}=\frac{\text{Stand}-\text{alone selling price of yoga coupon }}{\left(\begin{array}{l}\text{Stand}-\text{alone selling price of yoga coupon }\\ \text{+ Stand}-\text{alone selling price of gym }\end{array}\right)}\\ \text{=}\frac{\$30}{\left(\$30\text{ +}\$720\right)}\\ \text{=}\frac{\text{\$30}}{\text{\$750}}\\ \text{=4\%}\end{array}$ (3)

4. Calculate the gym membership percentage:

Given,

The calculated stand-alone selling price of yoga coupon is $30 (1)

Stand-alone selling price of gym is $720

Calculation of the gym membershippercentage:

$\begin{array}{c}\text{Gym percentage}=\frac{\text{Stand-alone selling price of Gym}}{\left(\begin{array}{l}\text{Stand-alone selling price of yoga coupon }\\ \text{+ Stand-alone selling price of gym}\end{array}\right)}\\ \text{=}\frac{\$720}{\left(\$30\text{ +}\$720\right)}\\ \text{=}\frac{\text{\$720}}{\text{\$750}}\\ \text{=96\%}\end{array}$ (4)

(1), (c)

To determine

To prepare: The journal entry for F&S.

Answer to Problem 5.1P

The journal entry to record the gym services is as follows:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
XXX	Cash		$700
	Service revenue – Membership fees			$672
	Deferred revenue – Yoga coupon			$28
	(To record the service performed to customer)

Table (2)

Explanation of Solution

• Cash is an asset, and it increases the value of asset by $700, hence debit the cash for $700.
• Service revenue increases the value of stockholders’ equity by $672 hence credit the Service revenue for $672.
• Deferred revenue is a liability, and it increases the value of liability by $28, hence credit the deferred revenue for $28.

Conclusion

Therefore, the journal entry of F&S is recorded.

 (2), (a)

To determine

The number of performance obligations exist in the Fit 50 member.

Answer to Problem 5.1P

Number of performance obligation in the contract is one, because member can access the gym for 50 visits.

Explanation of Solution

F&S offers a Fit 50 coupon book with 50 prepaid visits. In this case, the performance of obligation is completed when the customer purchase the book of $500.

Conclusion

Therefore, the number of performance obligation for purchase of Fit 50 coupon book is one.

(2), (b)

To determine

The amount of contract price allocated to each performance obligation.

Answer to Problem 5.1P

The amount of contract price allocated to the performance of obligation is $500.

Explanation of Solution

In this case, the additional prepaid visit is not a performance obligation. So, visitation fees per visit are not included in the contract price of Fit 50 coupon book.

Conclusion

Therefore, the selling price of Fit 50 book is $500.

(2), (b)

To determine

To prepare: The journal entry for F&S.

Answer to Problem 5.1P

The journal entry to record the coupon book is as follows:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
XXX	Cash		$500
	Deferred revenue – coupon book			$500
	(To record service performed)

Table (3)

Explanation of Solution

• Cash is an asset, and it increases the value of asset by $500, hence debit the cash for $500.
• Deferred revenue is a liability, and it increases the value of liability by $500, hence credit the deferred revenue for $500.

Conclusion

Therefore, the journal entry of F&S is recorded.