Question

Clarks Incorporated, a shoe retailer, sells boots in different styles. In early November the company starts selling "SunBoots" to customers for $60 per pair. When a customer purchases a pair of SunBoots, Clarks also gives the customer a 20% discount coupon for any additional future purchases made in the next 30 days. Customers can’t obtain the discount coupon otherwise. Clarks anticipates that approximately 10% of customers will utilize the coupon, and that on average those customers will purchase additional goods that normally sell for $150. Required: How many performance obligations are in a contract to buy a pair of SunBoots? Assume Clarks cannot estimate the stand-alone selling price of a pair of SunBoots sold without a coupon.

Answer 1

In the case of Clarks Incorporated, there is one performance obligation in the contract to buy SunBoots, as the sale of the boots and the 20% discount coupon are bundled into a single offering to the customer.

Step-by-step explanation:

In the scenario where Clarks Incorporated sells SunBoots and provides a 20% discount coupon for future purchases, the accounting treatment of the transaction must adhere to revenue recognition principles. Specifically, how many performance obligations are present in this contract to buy a pair of SunBoots is in question. Performance obligations are promises in a contract to transfer goods or services to a customer.

If Clarks cannot estimate the stand-alone selling price of the boots without the coupon, it suggests that the coupon is not being accounted for as a separate performance obligation. Instead, the transaction for the boots and the coupon are likely considered as one combined performance obligation since the coupon is an integral part of the initial offer and cannot be obtained separately.

Hence, in the contract to buy a pair of SunBoots that includes the issuance of a 20% discount coupon for future purchases, there is one single performance obligation. This is because the sale of the SunBoots and the discount coupon are highly interrelated and regarded as one package, where the coupon is an additional incentive provided at the point of the initial sale.