Allocating Transaction Price to Performance Obligations and Recording Sales

Value Dealership Inc. markets and sells the 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 $500. During October 2020, Value Dealership Inc. sold 30 vehicles for $30,250 per vehicle, each with a free annual maintenance contract.

When answering the following questions:

• Round each allocated transaction price to the nearest dollar.
• If a journal entry (or 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. answers blank (zero).

a. Ignoring the cost entries, record the journal entry in October 2020 for Value Dealerships sale of vehicles with the associated maintenance contracts to customers.

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

Account Name	Dr.	Cr.
Answer Cash, Accounts Receivable, Due from Consignee, Inventory, Prepaid Expense, Contract Asset, Prepaid Advertising Expense Accounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A
Sales RevenueVehicle
AnswerCashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A

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 $650. Ignoring the cost entries, record the journal entry in October 2020 for Value Dealerships sale of vehicles to its customers.

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

Account Name	Dr.	Cr.
AnswerCashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A	Answer	Answer
Sales RevenueVehicle	Answer	Answer
AnswerCashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A	Answer	Answer

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 $400 for the year and the expected profit margin on the service contract is 35%. Ignoring the cost entries, record the journal entry in October 2020 for Value Dealerships sale of vehicles to its customers.

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

Account Name	Dr.	Cr.
AnswerCashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A	Answer	Answer
Sales RevenueVehicle	Answer	Answer
AnswerCashAccounts ReceivableDue from ConsigneeInventoryPrepaid ExpenseContract AssetPrepaid Advertising ExpenseAccounts PayableConsideration PayableDeferred Maintenance RevenueSales RevenueService RevenueCommission RevenueCost of Goods SoldAdvertising ExpenseInterest ExpenseSales Commission ExpenseN/A	Answer	Answer