Revenue Recognition - Introduction

Question 1

Jenkins sells a refrigerator and a warranty on the refrigerator to Carter for $45,000. The refrigerator alone is worth $40,000. The warranty is for five years and can be sold separately at a cost of $10,000. Which of the following statements is most accurate in regard to this transaction?

Answer 1

The warranty, will represent 20 percent of the allocated contract price.

The warranty because it can be sold separately, will be treated as a separate performance obligation from the sale of the refrigerator. As such, the $45,000 contract price will need to be allocated between the warranty and the refrigerator. Based on the separate values of $10,000 for the warranty and $40,000 for the refrigerator (totaling $50,000), the most appropriate allocation will be 20 percent of the contract price ($9,000) for the warranty and 80 percent of the price ($36,000) for the refrigerator.