The Ole Factory, Inc. sells scented beauty products and personal care items. It

Question

The Ole Factory, Inc. sells scented beauty products and personal care items. It is currently offering a promotion in conjunction with the launch of its new consulting business: customers can purchase a Deluxe Beauty Kit for $500, which is the normal retail price for this item, plus get one month's free access to an online Beauty Consultant, which normally costs $40 per month. For each Deluxe Beauty Kit sold as part of this promotion, how much revenue and deferred revenue should The Ole Factory recognize at the time of sale and how should it be allocated?

Multiple Choice

a. $500 total revenue, allocated $460 to the kit and $40 to the service.

b. $500 total revenue, allocated $463 to the kit and $37 to the service.

c. $500 total revenue, allocated $460 to the kit and $40 to the service. Deferred revenue of $240 recorded.

d. $500 total revenue, allocated entirely to the kit. Deferred revenue of $240 recorded.

Explanation / Answer

Answer:- B. $500 total revenue allocated $463 to the kit and $37 to the service

Explanation :- The one months free access to the online beauty consultant is a distinct performance obligation because it is capable of being distinct and evidenced by the ole factory selling the service seperately, and it is seperately identifiable from the other item included in the bundle. When two or more distinct performance obligations are included in the same sale, the total revenue is allocated in proportion to the seperate sales prices of the items.

As a result, the deluxe beauty kit will be allocated ($500/$540)×$500 in revenue or $463 and the months free access will be allocated ($40/$540)×$500 in revenue or $37.

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