Requirement – 1
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
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.
Requirement – 1
Answer to Problem 5.2P
Number of performance obligation in the contract is two, they are as follows:
- 1) Delivery of pro tab computer
- 2) Purchase of pro book
Explanation of Solution
C Computing sells the Pro tab for $780 selling price, and in addition to that C Computing gave a coupon to purchase a creative pro book. Hence, sale of Pro tab is first performance obligation, and creative pro book coupon is second performance obligation.
Therefore, the number of performance obligation in the Pro tab computer is two.
Requirement – 2
The amount of contract price allocated to each performance obligation.
Requirement – 2
Answer to Problem 5.2P
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) | 95% (4) | 74,100,000 (6) |
| Pro book | 4,000,000 (1) | 5% (3) | 3,900,000 (5) |
| Total | 80,000,000 | 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:
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:
3. Calculate the pro book percentage:
Given,
Calculated stand-alone selling price of pro book is $4,000,000
Total stand-alone selling price is $80,000,000
Now, calculate the pro book percentage:
4. 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 $80,000,000
Now, calculate the pro tab percentage:
5. 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 5%.
Now, calculate the sellingprice of pro book:
6. 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 95%.
Now, calculate the sellingprice of pro tab:
The transaction price of each performance obligation is calculated.
Requirement – 3
To prepare: The
Requirement – 3
Answer to Problem 5.2P
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 | 74,100,000 | |||
| Deferred revenue – Pro book | 3,900,000 | |||
| (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 $74,100,000 hence credit the Service revenue for $74,100,000. - Deferred revenue is a liability, and it increases the value of liability by $3,900,000, hence credit the deferred revenue for $3,900,000.
Therefore, the journal entry for sales made by C Computing is recorded.
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Chapter 5 Solutions
Intermediate Accounting
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