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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Luke’s Gameday Company sells a package of goods and services to its customers. The package includes four FCS Championship football tickets, a reserved parking space, a pregame party, and four pregame sideline passes. The package sells for $18,000. Because the stand-alone selling for the pregame party and sideline passes is not observable, Luke’s Gameday Company is interested in determining how to allocate the transaction price to each underlying performance obligation.

Required:

Discuss what methods are available for estimating a stand-alone selling price for a good or service when the stand-alone selling price is not directly observable. Which method is preferred?

To determine

Discuss the methods available for estimating a stand-alone selling price for a good or service if the stand-alone selling price is not directly observable.

Explanation

The following methods are suggested by GAAP for estimating the stand-alone selling price (but other Methods could be used):

  • “Adjusted market assessment approach”
  • “Expected cost plus a margin approach”
  • “Residual approach”

Adjusted Market Assessment Approach

“Adjusted market approach” considers the market wherein, the sale of goods and services takes place and it anticipates the price that the customer is willing to pay in the market. Factors like price of competitors, position of market, structure of cost must also be examined. If a single good or service is sold in multiple markets, then it could have more than one stand-alone selling price. While estimating stand-alone selling prices, Discounts provided by an entity when a good or service is sold separately must be taken into consideration.

Expected Cost plus a Margin Approach

In “Expected Cost plus a Margin Approach method”, “gross profit margin “is added to the expected cost of the goods or service by the seller. Costs included in the estimate must be constant with those entity that generally considerers in setting “stand-alone prices”. In this method, both direct and indirect costs should be considered...

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