Question

As a promotion, TrueTech Industries offers a 50% coupon for a gaming headset with the purchase of a Tri-Box at 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.

1. How would TrueTech account for the cash sale of 100 Tri-Boxes sold under this promotion on January 1,2016?
2.How would TrueTech account for this arrangement if it normally sells a headset at a 15% discount off its $120 list price? (Assume all other facts are unchanged.)

Answer 1

TrueTech Industries would account for the cash sale of 100 Tri-Boxes by recording the revenue from the sale of the Tri-Boxes at the normal price of $240. They would also record the revenue from the coupon as a deferred revenue liability. If TrueTech normally sells a headset at a 15% discount, they would account for the sale of Tri-Boxes by recognizing the revenue at the discounted price of $204.

Step-by-step explanation:

1. To account for the cash sale of 100 Tri-Boxes sold under this promotion on January 1, 2016, TrueTech Industries would record the revenue from the sale of the Tri-Boxes at the normal price of $240.

They would also record the revenue from the coupon as a deferred revenue liability, since it is an obligation that must be fulfilled in the future. The coupon revenue would be recognized when customers exercise the coupon within one year.

2. If TrueTech normally sells a headset at a 15% discount off its $120 list price, they would account for this arrangement by recognizing the revenue from the sale of the Tri-Boxes at the discounted price of $204.

The revenue from the coupon would still be recognized as a deferred revenue liability, and it would be recognized when customers exercise the coupon within one year.