Allocating Transaction Price to Performance Obligations and Recording Sales

Value Dealership Inc. markets and sells vehicles to retail customers. Along with a new vehicle purchase, a customer will receive a free annual maintenance contract for one year from the date of purchase. The standalone selling price of a vehicle is $30,000 and the standalone selling price for the annual maintenance contract is $612. During October, Value Dealership Inc. sold 30 vehicles for $30,250 per vehicle, each with a free annual maintenance contract.

Note: Carry all decimals in calculations; round the final answer to the nearest dollar.

Note: If a line of the journal entry isn't required for the transaction, select "N/A" as the account name and leave the Dr. and Cr. answer blank (zero).

a. Determine how the transaction price should be allocated among the performance obligation(s) and record the journal entry in October for Value Dealerships sale of 30 vehicles with the associated maintenance contracts to customers. Ignore the cost entry.

	Performance Obligations	Transaction Price as Stated	Standalone Selling Price	Allocated Transaction Price (rounded)
	One Vehicle	Answer	Answer	Answer
	Annual maintenance contract	Answer	Answer	Answer

	Account Name	Dr.	Cr.
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/A		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/A		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/A		Answer
	To record the sale of vehicles with associated maintenance contracts.

b. Assume the same information above except that the standalone selling price of the annual maintenance contract is not known because this was the first time Value Dealership offered the service. Value Dealership is uncertain as to what services, on average, a customer will take advantage of during the year of the contract. The Dealership researched competitor prices and determined that the average selling price for a maintenance service contract is $640. Determine how the transaction price should be allocated among the performance obligation(s) and record the journal entry in October for Value Dealerships sale of 30 vehicles to its customers. Ignore the cost entry.

	Performance Obligations	Transaction Price as Stated	Standalone Selling Price	Allocated Transaction Price (rounded)
	One Vehicle	Answer	Answer	Answer
	Annual maintenance contract	Answer	Answer	Answer

	Account Name	Dr.	Cr.
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	To record the sale of vehicles.

c. Assume the same information (original scenario) above except that the standalone selling price of the annual maintenance contract is not known because this was the first time Value Dealership offered the service. Value Dealership determined that the cost of the annual contract is $445 for the year and the expected profit margin on the service contract is 35%. Determine how the transaction price should be allocated among the performance obligation(s) and record the journal entry in October for Value Dealerships sale of 30 vehicles to its customers. Ignore the cost entry.

	Performance Obligations	Transaction Price as Stated	Standalone Selling Price	Allocated Transaction Price (rounded)
	One Vehicle	Answer	Answer	Answer
	Annual maintenance contract	Answer	Answer	Answer

	Account Name	Dr.	Cr.
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Maintenance RevenueInventorySales RevenueVehicleN/ANo list available		Answer
	To record the sale of vehicles.