Question

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only $800
Oven with installation service 850
Oven with maintenance services 975
Oven with installation and maintenance services 1,000

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $175. Additionally, the incremental amount charged by Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800.

a. Assume that a customer purchases an oven with both installation and maintenance services for $1,000. Based on its experience, Appliance Center believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately (i.e., the three components are distinct).

b. Identify the separate performance obligations related to the Appliance Center revenue arrangement.

Answer 1

Answer is explained in the explanation section.

Step-by-step explanation:

Solution:

Data Given:

Price of Oven Only = $800

Price of Oven with installation services = $850

Price of Oven with maintenance services = $975

Price of Oven with Installation and maintenance = $1000

So, with this data, we can calculate the total price of the oven:

Total Price = $800 + 50 + 175 = 1025

Now, we need to find out the allocation of price to the oven by using the following formula:

PA = Price Allocation

PA = (Price of Oven Only divided by Total Price) multiplied by the Price paid by the customer.

So,

We have all the values, just plugging in the above equation:

PA =
`(800)/(1025)` x $1000

PA = $780.48 is the price allocation for Oven.

Similarly, we need to find the Price allocation of maintenance services:

PA = (Price of maintenance Only divided by Total Price) multiplied by the Price paid by the customer.

PA =
`(175)/(1025)` x 1000

PA = $170.73 is the amount that must be allocated to the maintenance services.

Similarly, for Installation services:

PA = (Price of installation Only divided by Total Price) multiplied by the Price paid by the customer.

PA =
`(50)/(1025)` x 1000

PA = $48.78 is the price allocation for installation services.