Question

(Allocate Transaction Price) Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only \( 800

Oven with installation service 850

Oven with maintenance services 975

Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at \)175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds \(800.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for \)1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct). Identify the separate performance obligations related to the Appliance Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.

Short answer

Price allocated for oven = $780.48.

Price allocated for installation service = $48.78.

Price allocated for maintenance service = $170.73.

Step-by-step solution

Meaning of Performance Obligations

The word "performance Obligation"refers to the seller's duty to execute the contract's terms and sell or provide services to consumers as promised. It might be stated explicitly, obliquely, or based on industry norms.

Separate performance obligations and price allocation

The price of the oven is $800

$$\begin{gathered} \mathrm{Installation}\mathrm{charges}=\mathrm{Price}\mathrm{with}\mathrm{Installation}\mathrm{service}-\mathrm{Price}\mathrm{of}\mathrm{oven} \\ =\$850-\$800 \\ =\$50 \end{gathered}$$

$$\begin{gathered} \mathrm{Maintenance}\mathrm{charges}=\mathrm{Price}\mathrm{with}\mathrm{maintenance}\mathrm{service}-\mathrm{Price}\mathrm{of}\mathrm{oven} \\ =\$975-\$800 \\ =\$175 \end{gathered}$$

$$\begin{gathered} \mathrm{Total}\mathrm{price}=\mathrm{Price}\mathrm{of}\mathrm{oven}+\mathrm{Installation}\mathrm{charges}+\mathrm{Maintenance}\mathrm{charges} \\ =\$800+\$50+\$175 \\ =\$1025 \end{gathered}$$

Price allocation:

$$\begin{gathered} \mathrm{Price}\mathrm{allocation}\mathrm{for}\mathrm{oven}=\frac{\mathrm{Price}\mathrm{of}\mathrm{oven}}{\mathrm{Total}\mathrm{price}}\times \mathrm{Price}\mathrm{paid}\mathrm{by}\mathrm{customer} \\ =\frac{\$800}{\$1025}\times \$1,000 \\ =\$780·48 \end{gathered}$$

$$\begin{gathered} \mathrm{Allocation}\mathrm{to}\mathrm{the}\mathrm{maintenance}=\frac{\mathrm{Maintenance}\mathrm{charges}}{\mathrm{Total}\mathrm{Price}}\times \mathrm{Price}\mathrm{paid}\mathrm{by}\mathrm{customer} \\ =\frac{\$175}{\$1025}\times \$1,000 \\ =\$170·73 \end{gathered}$$

$$\begin{gathered} \mathrm{Allocation}\mathrm{for}\mathrm{installation}=\frac{\mathrm{Installation}\mathrm{charges}}{\mathrm{Total}\mathrm{Price}}\times \mathrm{Price}\mathrm{paid}\mathrm{by}\mathrm{customers} \\ =\frac{\$50}{\$1025}\times \$1,000 \\ =\$48·78 \end{gathered}$$