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Chapter 18: Q18-6P_1 (page 1044)

P18-6 (LO3) (Warranty, Customer Loyalty Program) Hale Hardware takes pride as the “shop around the corner” that can compete with the big-box home improvement stores by providing good service from knowledgeable sales associates (many of whom are retired, local handymen). Hale has developed the following two revenue arrangements to enhance its relationships with customers and increase its bottom line.

1. Hale sells a specialty portable winch that is popular with many of the local customers for use at their lake homes (putting docks in and out, launching boats, etc.). The Hale winch is a standard manufactured winch that Hale modifies so the winch can be used for a variety of tasks. Hale sold 70 of these winches in 2017 at a total price of \(21,000, with a warranty guarantee that the product was free of any defects. The cost of winches sold is \)16,000. The assurance warranties extend for a 3-year period with an estimated cost of \(2,100. In addition, Hale sold extended warranties related to 20 Hale winches for 2 years beyond the 3-year period for \)400 each.

2. To bolster its already strong customer base, Hale implemented a customer loyalty program that rewards a customer with 1 loyalty point for every \(10 of purchases on a select group of Hale products. Each point is redeemable for a \)1 discount on any purchases of Hale merchandise in the following 2 years. During 2017, customers purchased select group products for \(100,000 (all products are sold to provide a 45% gross profit) and earned 10,000 points redeemable for future purchases. The standalone selling price of the purchased products is \)100,000. Based on prior experience with incentives programs Problems 1045 like this, Hale expects 9,500 points to be redeemed related to these sales (Hale appropriately uses this experience to estimate the value of future consideration related to bonus points).

Instructions

Identify the separate performance obligations in the Hale warranty and bonus point programs, and briefly explain the point in time when the performance obligations are satisfied.

Short Answer

Expert verified

Warranty performance obligations include providing 70 units of specialty winches. Bonus point performance obligations include delivery of the product to customers using bonus points.

Step by step solution

01

Definition of Warranty Expense

The cost of replacing or repairing any defective product is a warranty expense. Such expenses are incurred only up to the warranty period of the product.

02

Point in time when performance obligations are satisfied and Warrant Performance obligation

(a) Warranty performance obligation:

1. Transfer 70 units of specialty winches with a total price of $21,000.

2. To provide an extended warranty period of 2 years beyond the period of 3 years in respect of 20 Hale Winches with a price of $8,000.

(b) Performance obligation in respect of bonus point programs:

1. Assured delivery of the product.

2. Delivery of products in the future period that customers will purchase using the bonus points.

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Most popular questions from this chapter

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(b) Shaw prepares an income statement for the first quarter of 2017, ending on March 31, 2017 (installation was completed on June 18, 2017). How much revenue should Shaw recognize related to its sale to Ricard?

On October 10, 2017, Executor Co. entered into a contract with Belisle Inc. to transfer Executor’s specialty products (sales value of \(10,000, cost of \)6,500) on December 15, 2017. Belisle agrees to make a payment of $5,000 upon delivery and signs a promissory note to pay the remaining balance on January 15, 2018. What entries does Executor make in 2017 on this contract? Ignore time value of money considerations

Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells \(4,000 of prepaid cards in January 2017. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is \)3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April.

When must multiple performance obligations in a revenue arrangement be accounted for separately?

(Contract Costs) Rex’s Reclaimers entered into a contract with Dan’s Demolition to manage the processing of recycled materials on Dan’s various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Rex’s incurs selling commission costs of \(2,000 to obtain the contract. Before performing the services, Rex’s also designs and builds receptacles and loading equipment that interfaces with Dan’s demolition equipment at a cost of \)27,000. These receptacles and equipment are retained by Rex’s and can be used for other projects. Dan’s promises to pay a fixed fee of \(12,000 per year, payable every 6 months for the services under the contract. Rex’s incurs the following costs: design services for the receptacles to interface with Dan’s equipment \)3,000, loading equipment controllers \(6,000, and special testing and OSHA inspection fees \)2,000 (some of Dan’s projects are on government property).

Instructions

(a) Determine the costs that should be capitalized as part of Rex’s Reclaimers revenue arrangement with Dan’s Demolition.

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