Question

Assume TrueTech sells 1,000 Tri-Boxes with a one-year Tri-Net subscription at $250. The stand-alone selling price of the Tri-Box is $240. The stand-alone selling price of the one-year subscription is highly uncertain because TrueTech hasn't established a price for it. Requirement: Allocate transaction price using the residual approach:

Under the residual approach:

Answer 1

The residual approach allocates the known stand-alone selling price to the product first, and any remaining transaction price to the uncertain priced item. In this case, $240 is allocated to each Tri-Box, and $10 to the Tri-Net subscription for each of the 1,000 units sold.

Step-by-step explanation:

To allocate the transaction price using the residual approach, we need to recognize that TrueTech has sold a bundle that includes both a Tri-Box and a one-year Tri-Net subscription for $250. However, the stand-alone selling price for the Tri-Net subscription is not readily available or certain, making it difficult to determine the exact value for the subscription service apart from the bundle.

The residual approach suggests that we should first allocate the transaction price to the known stand-alone selling price of the Tri-Box, which is $240.

The residual value, or the remaining transaction price after this allocation, should then be attributed to the Tri-Net subscription.

So for each bundle sold at $250, we allocate $240 to the Tri-Box, and the remaining $10 ($250 - $240) is allocated to the Tri-Net subscription.

When TrueTech sells 1,000 units, the total allocation for the Tri-Box would be $240,000 ($240 per unit x 1,000 units), and the total for the Tri-Net subscriptions would be $10,000 ($10 per unit x 1,000 units).