Question

Fuhremann Co. is a full-service manufacturer of surveillance equipment. Customers can purchase any combination of equipment, installation services, and training as part of Fuhremann’s security services. Thus, each of these performance obligations is separate from individual standalone selling prices. Laplante Inc. purchased cameras, installation, and training at a total price of \(80,000. Estimated standalone selling prices of the equipment, installation, and training are \)90,000, \(7,000, and \)3,000, respectively. How should the transaction price be allocated to the equipment, installation, and training?

Short answer

Transaction price allocated to:

Equipment - $72,000

Installation - $5,600

Training - $2,400

Step-by-step solution

Meaning of Transaction Price

The term transaction price is referred to the process of deciding the amount to be received by a seller from its customers for the promised product or service. The transaction price may be fixed or change depending on the transaction's time or performance.

Transaction price allocated to equipment, installation, training

Equipment, installation, and training are three different performance duties since each part sells individually and has a separate standalone selling price.

Based on their respective standalone selling prices, the total income of $80,000 should be divided among the three performance commitments. As a result, the anticipated total selling price is $100,000. Hence, the distribution is as follows:

Working Notes:

The selling price of equipment = $90,000

The selling price of installation = $7,000

The selling price of training = $3,000

Total price at which Laplante Inc. purchased cameras, installation, training = $80,000

$\begin{array}{rcl}\mathrm{Total}\mathrm{selling}\mathrm{price}& =& \mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{equipment}+\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{installation}+\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{training}\\ & =& \$90,000+\$7,000+\$3,000\\ & =& \$100,000\end{array}$

Calculation of transaction price allocated to equipment is as follows:

$\begin{array}{rcl}\mathrm{Transaction}\mathrm{price}\mathrm{allocated}\mathrm{to}\mathrm{equipment}& =& \frac{\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{equipment}}{\mathrm{Total}\mathrm{selling}\mathrm{price}}\times \mathrm{Total}\mathrm{purchase}\mathrm{price}\\ & =& \frac{\$90,000}{\$100,000}\times \$80,000\\ & =& \$72,000\end{array}$

Calculation of transaction price allocated to installation is as follows:

$\begin{array}{rcl}\mathrm{Transaction}\mathrm{price}\mathrm{allocated}\mathrm{to}\mathrm{installation}& =& \frac{\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{installation}}{\mathrm{Total}\mathrm{selling}\mathrm{price}}\times \mathrm{Total}\mathrm{purchased}\mathrm{price}\\ & =& \frac{\$7,000}{\$100,000}\times \$80,000\\ & =& \$5,600\end{array}$

Calculation of transaction price allocated to training is as follows:

$\begin{array}{rcl}\mathrm{Transaction}\mathrm{price}\mathrm{allocated}\mathrm{to}\mathrm{training}& =& \frac{\mathrm{Selling}\mathrm{price}\mathrm{of}\mathrm{training}}{\mathrm{Total}\mathrm{selling}\mathrm{price}}\times \mathrm{Total}\mathrm{purchased}\mathrm{price}\\ & =& \frac{\$3,000}{\$100,000}\times \$80,000\\ & =& \$2,400\end{array}$