Creative Computing sells a tablet computer called the Protab. The $780 sales price of a Protab Package includes the following:

One Protab computer.

A 6-month limited warranty. This warranty guarantees that Creative will cover any costs that arise due to repairs or replacements associated with defective products for up to six months.

A coupon to purchase a Creative Probook e-book reader for $200, a price that represents a 50% discount from the regular Probook price of $400. It is expected that 20% of the discount coupons will be utilized.

A coupon to purchase a one-year extended warranty for $50. Customers can buy the extended warranty for $50 at other times as well. Creative estimates that 40% of customers will purchase an extended warranty.

Creative does not sell the Protab without the limited warranty, option to purchase a Probook, and the option to purchase an extended warranty, but estimates that if it did so, a Protab alone would sell for $760.

Questions

1. How many performance obligations are included in a Protab Package? Explain your answer.

2. List the performance obligations in the Protab Package in the following table, and complete it to allocate the transaction price of 100,000 Protab Packages to the performance obligations in the contract. Creative Computing sells a tablet computer called

3.Prepare a journal entry to record sales of 100,000 Protab Packages (ignore any sales of extended warranties)

Solution and Explanation:

There are two kinds of performance obligations. One is which is sold with the product. It is a 6 months limited warranty. It assures that Company C will cover the cost of repair and maintenance if required during the period of 6 months after selling the product. But it is a limited warranty. It covers the only cost of the material used in the repair. It will not cover the cost of labor used while repairing the product.

Another obligation is a coupon to purchase the C ProBook e-book reader. It is a separate performance obligation. It is a coupon which is a kind of offer provided to the customers at the time of purchase. It is not necessary that every customer will avail this offer. The performance obligation is first depending upon the customer, whether the customer will use the coupon or not. If the coupon is used by the customer, a separate performance obligation is said to be performed.

The coupon to purchase the extended warranty is not a separate performance obligation. It is a coupon which is a kind of offer provided to the customers at the time of purchase but at the price for which the customer can buy at any time after the purchase. Thus, it does not provide any benefit to the customer.

B. The performance obligations are selling the Protab without limited warranty and coupons at $760. The coupon to purchase the ProBook is also a performance obligation which is sold separately. Coupon to purchase an extended warranty is not a performance obligation as it does not provide any special benefits to the buyer.

The Product P is sold for $760 and 100,000 units are sold. It will generate sales of $76,000,000. The coupon to purchase the ProBook is valued for $400 but available at discount of 50%. It will then be valued at $200. Out of 100,000 units, 20% will avail the coupon.

The coupon will provide the transaction value of $4,000,000 when coupon price per unit of $200 is multiplied by 100,000 units and 20% which is the percentage of customers who have availed the offer. The coupon to purchase the extended warranty is valued at $50 per coupon. Out of 100,000 packages, 50% customers avail this coupon.

The proportion of sales will be same between the three different obligations. Out of total sales, 95% sales belong to Protab. The performance obligation value of Product P with $780 value will be $74,100,000. It is determined by multiplying the percentage of Protab which is 95% of the transaction price per unit $780 and units sold 100,000.

The performance obligation value of the coupon to purchase ProBook e-book reader with $780 value will be $3,900,000. It is determined by multiplying the percentage of Protab 5% with the transaction price per unit $780 and units sold 100,000.

C. The product is sold by Company C with warranty and coupons at $780. Cash is debited by $78,000,000 as there is an increase in cash due to inflows. Any increase in assets is debited. Sales Revenue is credited by $74,100,000 as it is revenue and all revenues and incomes are credited. Deferred Revenue discount option is credited by $3,900,000 as it is an income for the company.

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