E18-7B (L03) (Allocate Transaction Price)

The Oven Center is an experienced home appliance dealer. The Oven Center also offers a number of services together with the home appliances that it sells. Assume that The Oven Center sells ovens on a standalone basis. The Oven Center also sells installation services and maintenance services for ovens. However, The Oven Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only $1,200

Oven with installation service 1,275

Oven with maintenance services 1,460

Oven with installation and maintenance services 1,500

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $260. Additionally, the incremental amount charged by The Oven Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with

installation and/or maintenance services, in the event The Oven Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $1,200.

Instructions

(a) Assume that a customer purchases an oven with both installation and maintenance services for $1,500. Based on its experience, The Oven Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately. Identify the separate performance obligations related to the Oven Center revenue arrangement.

(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.