Chapter 5, Problem 5.3P

Requirement – 1

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.

Warranty:

Warranty is the practice of normal business for quality assurance. It is obligation of the seller to make repairs or replace the product if there is any defect or unsatisfactory in future.

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 included in the Pro tab package.

Answer to Problem 5.3P

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

1. 1) Delivery of pro tab computer
2. 2) Purchase of pro book
3. 3) Extended warranty

Explanation of Solution

C Computing sells the Pro tab for $780 selling price; in addition to that C Computing gave a coupon to purchase a creative pro book, and extended the warranty. Hence, sale of Pro tab is one performance obligation, creative pro book coupon is second performance obligation, and extended warranty is third performance obligation.

Conclusion

Therefore, the number of performance obligation in the Pro tab computer is three.

Requirement – 2

To determine

The amount of contract price allocated to each performance obligation.

Answer to Problem 5.3P

The below table shows the amount of contract price allocated to each performance obligation:

Performance obligation	Stand-alone selling price of the performance obligation	Percentage of the sum of the stand-alone selling prices of the performance obligations	Allocation of total  transaction price to each performance obligation
Pro tab computer	76,000,000  (2)	93.83% (5)	73,187,400  (8)
Pro book	4,000,000  (1)	4.94% (4)	3,853,200  (7)
Extended warranty	1,000,000 (3)	1.23% (6)	959,400  (9)
Total	81,000,000	100%	78,000,000

Table (1)

Explanation of Solution

Working note:

1. Calculate the stand-alone selling price of pro book:

Given,

Discount rate is $50%,

Normal pro book price is $400,

Discount coupons issued is 100,000 units,

Estimated redemption is 20%.

Now, calculate the stand-alone selling price of pro book:

$\begin{array}{c}\text{Stand-alone selling price of discount=}\left(\begin{array}{l}\left(\begin{array}{l}\text{Discount }\\ \times \text{Normal probook price}\end{array}\right)\\ \times \left(\begin{array}{l}\text{Discount coupons issued }\\ \times \text{ Estimated redemption}\end{array}\right)\end{array}\right)\\ \text{=}\left(\$\text{5}0\%\times \$\text{4}00\right)\times \left(\text{1}00,000\times \text{2}0\%\right)\\ =\$4,000,000\end{array}$ (1)

2. Calculate the total stand-alone price of pro tab:

Given,

Price per unit is $760

Number of units is 100,000.

Now, calculate the total stand-alone price:

$\begin{array}{c}\begin{array}{l}\text{Total stand-alone }\\ \text{price }\end{array}\}\text{=}\left(\begin{array}{l}\text{Price per unit}\times \\ \text{Number of units}\end{array}\right)\\ \text{=}\left(\$\text{76}0\times \text{1}00,000\right)\\ =\$76,000,000\end{array}$ (2)

3. Calculate the stand-alone selling price of extended warrant:

Given,

Discount rate is $50%

Normal extended warranty price is $75, Discount coupons issued is 100,000 units Estimated redemption is 20%.

Now, calculate the stand-alone selling price of extended warrant:

$\begin{array}{c}\begin{array}{l}\text{Stand-alone selling }\\ \text{price of extended warrant}\end{array}\}\text{=}\left(\begin{array}{l}\left(\begin{array}{l}\text{Discount }\\ \times \text{Normal extended warranty price}\end{array}\right)\\ \times \left(\begin{array}{l}\text{Discount coupons issued }\\ \times \text{ Estimated redemption}\end{array}\right)\end{array}\right)\\ \text{=}\left(\$\text{5}0\%\times \$75\right)\times \left(\text{1}00,000\times \text{2}0\%\right)\\ =\$1,000,000\end{array}$ (3)

4. Calculate the pro book percentage:

Given,

Calculated stand-alone selling price of pro book is $4,000,000

Total stand-alone selling price is $81,000,000 $\left(\$76,000,000+\$4,000,000+\$1,000,000\right)$.

Now, calculate the pro book percentage:

$\begin{array}{c}\text{Pro book percentage}=\left(\frac{\text{Stand-alone selling price of probook}}{\text{Total stand-alone selling price}}\right)\\ \text{=}\frac{\$\text{4},000,000}{\$\text{81},000,000}\\ \text{=4}\text{.94\%}\end{array}$ (4)

5. Calculate the pro tab computer percentage:

Given,

The calculated stand-alone selling price of pro tab is $76,000,000

Total stand-alone selling price is $81,000,000 $\left(\$76,000,000+\$4,000,000+\$1,000,000\right)$.

Now, calculate the pro tab percentage:

$\begin{array}{c}\text{Pro tab percentage}=\left(\frac{\text{Stand-alone selling price of protab}}{\text{Total stand-alone selling price}}\right)\\ \text{=}\frac{\$76,000,000}{\$\text{81},000,000}\\ \text{=93}\text{.83\%}\end{array}$ (5)

6. Calculate the extended warrant percentage:

Given,

The calculated stand-alone selling price of extended warranty is $1,000,000

Total stand-alone selling price is $81,000,000 $\left(\$76,000,000+\$4,000,000+\$1,000,000\right)$

Now, calculate the extended warrant percentage:

$\begin{array}{c}\text{Warranty percentage}=\left(\frac{\text{Stand-alone selling price of warranty}}{\text{Total stand-alone selling price}}\right)\\ \text{=}\frac{\$1,000,000}{\$\text{81},000,000}\\ \text{=1}\text{.23\%}\end{array}$ (6)

7. Calculate the selling price of pro book:

Given,

The calculated stand-alone selling price of pro book is $4,000,000

Calculated pro book percentageis 4.94%.

Now, calculate the sellingprice of pro book:

$\begin{array}{c}\text{Selling price of probook=}\left(\begin{array}{l}\text{Stand-alone selling price of probook}\\ \times \text{ Probook percentage}\end{array}\right)\\ \text{=}\$\text{4},000,000\text{×4}\text{.94\%}\\ \text{=\$3,853,200}\end{array}$ (7)

8. Calculate the selling price of pro tab computer:

Given,

The calculated stand-alone selling price of pro tab is $76,000,000

Calculated pro tab percentageis 93.83%.

Now, calculate the sellingprice of pro tab:

$\begin{array}{c}\text{Selling price of protab =}\left(\begin{array}{l}\text{Stand-alone selling price of protab }\\ \times \text{ Protab percentage}\end{array}\right)\\ \text{=}\$76,000,000\text{×95\%}\\ \text{=\$74,100,000}\end{array}$ (8)

9. Calculate the selling price of extended warrant:

Given,

The calculated stand-alone selling price of warrenty is $1,000,000

Calculated warrenty percentageis 1.23%.

Now, calculate the sellingprice of extended warranty:

$\begin{array}{c}\text{Selling price of extended warranty =}\left(\begin{array}{l}\text{Stand-alone selling price of warranty }\\ \times \text{ Protab percentage}\end{array}\right)\\ \text{=}\$1,000,000\text{×1}\text{.23\%}\\ \text{=\$959,400}\end{array}$ (9)

Conclusion

The transaction price of each performance obligation is calculated.

Requirement – 3

To determine

To prepare: The journal entry for sales of pro tab packages.

Answer to Problem 5.3P

The journal entry to record the sales of 100,000 pro tab packages is as follows:

Date	Account Title and Explanation	Post Ref.	Debit $	Credit $
XXX	Cash		78,000,000
	Service revenue – Pro tab			73,187,400
	Deferred revenue – Pro book			3,853,200
	Deferred revenue – Warranty			959,400
	(To record the service performed to customer)

Table (2)

Explanation of Solution

• Cash is an asset, and it increases the value of asset by $78,000,000, hence debit the cash for $78,000,000.
• Service revenue increases the value of stockholders’ equity by $73,187,400 hence credit the Service revenue for $73,187,400.
• Deferred revenue is a liability, and it increases the value of liability by $3,853,200, hence credit the deferred revenue for $3,853,200.
• Deferred revenue is a liability, and it increases the value of liability by $959,400, hence credit the deferred revenue for $959,400.

Conclusion

Therefore, the journal entry for sales made by C Computing is recorded.