250 SECTION 1 The Role of Accounting as an Information System The way we account for payments by a seller to a customer depends on the specifics of the arrangement. If the seller is purchasing distinct goods or services from the customer at the fair value of those goods or services, we account for that purchase as a separate transaction. If a seller pays more for distinct goods or services purchased from its customer than the fair value of those goods or services, those excess payments are viewed as a refund. They are subtracted from the amount the seller is entitled to receive when calculating the transaction price of the sale to the customer. In our Samsung example, if Samsung pays more for dedicated floor space at BestBuy than the fair value of that floor space, Samsung should treat that excess payment as a refund to BestBuy of part of the price paid by BestBuy for Samsung products. Special Issues for Step 4: Allocate the Transaction Price to the Performance Obligations We already discussed the need for the seller to allocate the transaction price to each performance obligation in a contract in proportion to the stand-alone selling prices of the goods or services. We also noted that when goods and services aren’t normally sold separately, sellers must estimate those stand-alone selling prices. Various approaches are available to estimate stand-alone selling prices. Examples include the following: 1. Adjusted market assessment approach: The seller considers what it could sell the product or services for in the market in which it normally conducts business, perhaps referencing prices charged by competitors. 2. Expected cost plus margin approach: The seller estimates its costs of satisfying a performance obligation and then adds an appropriate profit margin. 3. Residual approach: The seller estimates an unknown (or highly uncertain) stand-alone selling price by subtracting the sum of the known or estimated stand-alone selling prices of other goods and services in the contract from the total transaction price of the contract. The residual approach is allowed only if the stand-alone selling price is highly uncertain, either because the seller hasn’t previously sold the good or service and hasn’t yet determined a price for it, or because the seller provides the same good or service to different customers at substantially different prices. Illustration 5–19 provides an example of the residual approach. The residual approach is used to estimate a standalone selling price that is very uncertain. Assume the same facts as Illustration 5–7 , except that the stand-alone selling price of the one-year Tri-Net subscription is highly uncertain because TrueTech hasn’t sold that service previously and hasn’t established a price for it. Under the residual approach, the value of the subscription would be estimated as follows: Total price of Tri-Box with Tri-Net subscription ($250 3 1,000) $250,000 Stand-alone price of Tri-Box sold without subscription ($240 3 1,000) 240,000 Estimated stand-alone price of Tri-Net subscription $ 10,000 Based on these relative stand-alone selling prices, if CompStores orders 1,000 Tri-Box Systems at the normal wholesale price of $250 each, TrueTech records the following journal entry (ignoring any entry to record the reduction in inventory and corresponding cost of goods sold): Accounts receivable ..................................................... 250,000 Sales revenue ........................................................... 240,000 Deferred revenue .................................................... 10,000 TrueTech would convert the $10,000 of deferred revenue to revenue (debit deferred revenue; credit service revenue) over the one-year term of the Tri-Net subscription. Illustration 5–19 Allocating Transaction Price to Performance Obligations Using the Residual Approach
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