Exercise 5-6 Performance obligations; customer option for additional goods or se
ID: 2569108 • Letter: E
Question
Exercise 5-6 Performance obligations; customer option for additional goods or services [L05-2, 5-4, 5-5] Clarks Inc., a shoe retailer, sells boots in different styles. In early November the company starts selling "SunBoots" to customers for $80 per pair, when a customer purchases a pair of SunBoots, Clarks also gives the customer a 20% discount coupon for any additional future purchases made in the next 30 days. Customers can't obtain the discount coupon otherwise. Clarks anticipates that approximately 10% of customers will utilize the coupon, and that on average those customers will purchase additional goods nat normally sell for $250. Required: 1. How many performance obligations are in a contract to buy a pair of SunBoots? 2. Prepare a journal entry to record revenue for the sale of 1,100 pairs of SunBoots, assuming that Clarks uses the residual method to estimate the stand-alone selling price of SunBoots sold without the discount coupon Complete this question by entering your answers in the tabs below Required 1 Required 2 How many performance obligations are in a contract to buy a pair of SunBoots? Number of performance obligationsExplanation / Answer
1) Number of performance obligations in the contract = 2 The delivery of the Sunboots is one performance obligation. The second obligation is the discount coupon, which provides a material right to a customer who buys the boots, which he would not have had otherwise. 2) The journal entry using the residual method is given below: Cash (1100*$80) 88000 Sales revenue (88000-5500) 82500 Deferred revenue (1100*10%*$250*20%) (discount option) 5500 Note: The deferred revenue is calculated on the basis that 10% of the 1100 customers who bought boots will exercise the coupon, which means that 110 coupons would be used. The total purchases on the 110 coupons wold be 110*$250 = $27500 Discount would amount to 27500*20% = $5,500. which is the deferred revenue.