Clarks Inc., a shoe retailer, sells boots in different styles. In early November the company starts selling “SunBoots” to customers for $60 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 that normally sell for $110.
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| 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 1,500 pairs of SunBoots, assuming that Clarks uses the residual method to estimate the stand-alone selling price of SunBoots sold without the discount coupon.
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Explanation
| 1. |
| Number of performance obligations in the contract: 2. |
The delivery of SunBoots is one performance obligation. The discount coupon for additional future purchases is a second performance obligation because it provides a material right to the customer that the customer would not receive otherwise. That right to receive a discount is both capable of being distinct, as it could be could be sold or provided separately, and it is separately identifiable, as it is not highly interrelated with the other performance obligation of delivering SunBoots, and the seller’s role is not to integrate and customize them to create one product. So, the discount coupon is distinct and qualifies as a performance obligation.
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2.
If Clarks can’t estimate the stand-alone selling price of SunBoots, it will use the residual method to calculate that price as the amount of the total transaction price minus the value of the discount.
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| Cash (1,500 × $60) = $90,000 |
Deferred revenue (discount option) = (1,500 pairs × $110 average purchase price × 20% discount × 10% of customers estimated to redeem coupon)
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