Question

Tompson recently sold a machine for E100,000. Revenue related to the sale of the machine is recognised upon delivery to the customer's factory, and payment thereof is due promptly. Under the sales contract, Tompson has also committed to providing the customer with service and maintenance on the machine for 3 years at no additional charge. Tompson routinely sells the this type of machine for €90,000 on a stand alone basis, and it also offers a 3 year maintenance service on machines of this type for €30,000. It estimates that it will cost €10,000 to deliver the service and maintenace. The transaction price should be allocated as follows:

a) £70,000 for the machine and £30,000 for the service
b) £75,000 for the machine and £25,000 for the service
c) €90,000 for the machine and £10,000 for the service
d) €100,000 for the machine and £0 for the service

Answer 1

The transaction price should be allocated based on the standalone selling prices of the components, resulting in €90,000 for the machine and €10,000 for the service based on the information provided.

Step-by-step explanation:

The question pertains to the allocation of a transaction price for the sale of a machine that includes a service and maintenance contract. In this scenario, Tompson has sold a machine for €100,000, which includes 3 years of service and maintenance. The machine's standalone selling price is €90,000, and the 3-year maintenance service is priced at €30,000 separately. Thus, the correct allocation of the transaction price should reflect the fair value of each component. Since the standalone selling price of the machine is €90,000 and the service contract's fair value is €30,000, and considering the cost to Tompson for providing the service is €10,000, the transaction price should be allocated as:

• €90,000 for the machine
• €10,000 for the service