Question
ABC produces meat smokers for a variety of recreational and commercial purposes. Lucious, the owner of ABC, is planning to provide any person purchasing a
ABC produces meat smokers for a variety of recreational and commercial purposes. Lucious, the owner of ABC, is planning to provide any person purchasing a meat smoker a coupon entitling them to a 40% discount on a ten-year maintenance contract. However, ABC has never offered such maintenance contracts before. This new idea could affect ABCs revenue recognition, potentially requiring that some of each sale be deferred and possibly putting the company in violation of earnings-based debt covenants as a result. The Accountant says I dont see why I cannot just recognize all the revenue for the sale of a smoker when I sell the smoker, then I will cover the maintenance if I have to provide it in the future. Prove I cannot handle it that way! Elaborate a technical accounting research memo answering the following research questions:
- One question is whether the coupon for the maintenance contract should even be considered a separate performance obligation. What are the criteria for determining whether an option to purchase a maintenance contract constitutes a material right that gives rise to a performance obligation?
- Assuming the maintenance contract is viewed as a separate performance obligation, how should the transaction price be allocated to the performance obligations?
- ABC has never offered this sort of maintenance contract before. What approaches might ABC use to estimate the stand-alone selling price of the maintenance contract?
- The accountant is likely to say that, even if some of a transaction price can be allocated to multiple performance obligations, the entire transaction price should be recognized as revenue at the time the smoker is sold. When should the portion of the transaction price that is assigned to the maintenance contract be recognized as revenue?
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