On December 2, a customer signs a contract to buy an equipment and service plan

Question

On December 2, a customer signs a contract to buy an equipment and service plan bundle with cash. The equipment normally sells for $210 and is bundled with an 18-month service plan, which usually sells for $50 per month. The price for the bundle is $930 and the cost of the equipment to Smart Touch is $130. Smart Touch uses the perpetual inventory method and a relative sales value basis approach to allocate revenue between the equiment and the service plan. Round intermediary values to one decimal place and round final values to the nearest whole dollar.

- ROUND THROUGHOUT THE WHOLE PROBLEM

- CASH IS 930 ALREADY

- FIND 1) UNEARNED REVENUE & 2) MERCHANDISE SALES REVENUE

Explanation / Answer

1. Unearned revenue: $754 x 17/18 = $712

2. Merchandise sales revenue: $176

Note: In the absence of information, December 31 is assumed to be the year-end for purpose of computing the unearned revenue on the service plan. Thus, service revenue will be recognized for 1 month and 17 months will be unearned revenue. Entire equipment sales revenue will be recognized on delivery. It is assumed that the equipment has been delivered on date of signing contract.

Item Standalone selling price $ Percent of total standalone value Allocated transaction price $ Equipment 210 18.9% 176 Service plan (18 months x $50) 900 81.1% 754 Total 1110 100.0% 930

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