Question

Meyer & Smith is a full-service technology company. They provide equipment, installation services as well as training. Customers can purchase any product or service separately or as a bundled package. Container Corporation purchased computer equipment, installation and training for a total cost of $144,000 on March 15, 2021. Estimated standalone fair values of the equipment, installation and training are $90,000, $60,000 and $30,000 respectively. The journal entry to record the transaction on March 15, 2021 will include a _______.

Answer 1

Answer:

Credit to Unearned Service Revenue of $24,000

Explanation:

Given that,

Fair values:

Equipment = $90,000

Installation = $60,000

Training = $30,000

Total fair value = $90,000 + $60,000 + $30,000

                         = $180,000

Total cost of purchasing equipment, installation and training = $144,000

The cost to be allocated proportionately is as follows:

The transaction price allocated to the Equipment:

= Fair value of equipment × (Total cost ÷ Total fair value)

= $90,000 × ($144,000 ÷ $180,000)

= $90,000 × 0.8

= $72,000

The transaction price allocated to the Installation:

= Fair value of installation × (Total cost ÷ Total fair value)

= $60,000 × ($144,000 ÷ $180,000)

= $60,000 × 0.8

= $48,000

The transaction price allocated to the Training:

= Fair value of training × (Total cost ÷ Total fair value)

= $30,000 × ($144,000 ÷ $180,000)

= $30,000 × 0.8

= $24,000

Therefore, the journal entry to record the transaction on March 15, 2021 will include a credit to Unearned Service Revenue of $24,000 (for training).

Note: As the product is purchased and installed on the same day of purchase but the training would be provided in the future. Hence, it is treated as the unearned service revenue.