244 SECTION 1 The Role of Accounting as an Information System Special Issues for Step 3: Determine the Transaction Price Until now we’ve assumed that contracts indicate a fixed transaction price that will be paid at or soon after delivery. However, in some contracts the transaction price is less clear. Specific situations affecting the transaction price are (a) variable consideration and the constraint on its recognition, (b) sales with a right of return, (c) identifying whether the seller is acting as a principal or an agent, (d) the time value of money, and (e) payments by the seller to the customer. Let’s consider these one at a time. VARIABLE CONSIDERATION. Sometimes a transaction price is uncertain because some of the price depends on the outcome of future events. Contracts that include this variable consideration are commonplace in many industries, including construction (incentive payments), entertainment and media (royalties), health care (Medicare and Medicaid reimbursements), manufacturing (volume discounts and product returns), and telecommunications (rebates). Estimating Variable Consideration. When an amount to be received depends on some uncertain future event, the seller still should include the uncertain amount in the transaction price by estimating it. A seller estimates variable consideration as either (a) the expected value (calculated as the sum of each possible amount multiplied by its probability), or (b) the most likely amount, depending on which estimation approach better predicts the amount that the seller will receive. If there are several possible outcomes, the expected value will be more appropriate. On the other hand, if only two outcomes are possible, the most likely amount might be the best indication of the amount the seller will likely receive. Illustration 5–14 provides an example. ● LO5–6 The transaction price is the amount the seller expects to be entitled to receive from the customer. Variable consideration is estimated as either the expected value or the most likely amount. option. The seller recognizes revenue associated with the option when the option is exercised or expires. Illustration 5–13 provides an example. As a promotion, TrueTech Industries offers a 50% coupon for a gaming headset with the purchase of a Tri-Box for its normal price of $240. The headset costs $120 without a coupon (and $60 with a coupon), and the coupon must be exercised within one year of the Tri-Box purchase. TrueTech estimates that 80% of customers will take advantage of the coupon. How would TrueTech account for the cash sale of 100 Tri-Boxes sold under this promotion on January 1, 2016? The coupon provides a material right to the customer, because it provides a discount of $120 3 50% 5 $60, so it is a performance obligation. Therefore, TrueTech must allocate the $240 transaction price to two performance obligations: the Tri-Box and the coupon. Because TrueTech expects only 80% of the coupons to be used, it estimates the standalone selling price of a coupon to be $60 3 80% 5 $48. 17 The sum of the stand-alone selling prices of the performance obligations is $288, equal to the Tri-Box module ($240) plus the coupon ($48). The Tri-Box module ($240) represents five-sixths (or 83.33%) of the total ($240 4 $288 ), and the coupon comprises one-sixth (or 16.67%) of the total ($48 4 $288 ), so TrueTech allocates five-sixths of the $240 transaction price to the Tri-Box module and one-sixth to the coupon, as follows: January 1, 2016: Cash ......................................................................................... 24,000 Sales revenue ($240 3 5/6 3 100 units) ............................. 20,000 Deferred revenue—coupons ($240 3 1/6 3 100 units) ..... 4,000 When the coupons are later redeemed or expire, TrueTech will debit deferred revenue—coupons and credit revenue. Illustration 5–13 Customer options for additional goods or services. 17It may seem strange that we consider the likelihood that the customer will use the coupon when estimating the coupon’s stand-alone selling price, but think about it from TrueTech’s perspective. Each coupon saves a customer $60, but on average TrueTech will only have to provide discounts of $48, so $48 is its estimate of the average stand-alone value of its performance obligation.
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