Chapter 5, Problem 5.4P

Requirement – 1

To determine

Performance obligation:

Performance obligation is the promise made by the seller to supply the goods and service to the customer on or before the contract.

Customer options for additional goods or services:

Customer option for additional goods or services refers to the privilege that is given by the seller as a name of discounts. Seller grants the option to the customer to receive additional discount or additional goods or service at no cost.

Deferred revenues:

Collection of cash in advance to render service or to deliver goods in future is known as unearned revenues. These unearned revenues are considered as liabilities until they are earned. For the portion of rendered services or delivered goods, revenues would be recognized by way of passing an adjusting entry. Unearned revenue is also known as deferred revenues, because at the receiving of payment in advance, revenues are not recognized but deferred until they are earned.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To prepare: The journal entry of S Club to record July month sales.

Answer to Problem 5.4P

Journal entry for July month is as follows:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
2018	Cash $\left(\text{\$135,000}\times \text{80\%}\right)$		$108,000
July	Account receivable $\left(\text{\$135,000}\times 2\text{0\%}\right)$		$27,000
	Deferred revenue – purchased product (5)			$121,500
	Deferred revenue – loyalty point (6)			$13,500
	(To record service performed)

Table (1)

Explanation of Solution

• Cash is an asset, and it increases the value of asset by $108,000, hence debit the cash for $108,000.
• Accounts receivable is an asset, and it increases the value of asset by $27,000, hence debit the accounts receivable for $27,000.
• Deferred revenue – purchased product is a liability, and it increases the value of liability by $121,500, hence credit the deferred revenue for $121,500.
• Deferred revenue – loyalty point is a liability, and it increases the value of liability by $13,500, hence credit the deferred revenue for $13,500.

Working notes:

1. Calculate the stand-alone selling price of purchased product:

Given,

Value of the loyalty point is $25,000 $\left(\$125,000\times 20\%\right)$

Estimated redemption is 60%.

Now, calculate the stand-alone selling price of purchased product:

$\begin{array}{c}\begin{array}{l}\text{Stand-alone selling price}\\ \text{ of purchased product}\end{array}\}\text{=}\left(\begin{array}{l}\text{Value of the discount }\\ \times \text{Estimated redemption}\end{array}\right)\\ \text{=}\$25,000\times 60\%\\ =\$15,000\end{array}$ (1)

2. Calculate the total stand-alone price:

Given,

The stand-alone selling price of purchased product is $135,000

Calculated stand-alone selling price of loyalty point is $15,000 (1)

Now, calculate the total stand-alone price:

$\begin{array}{c}\begin{array}{l}\text{Total stand-alone }\\ \text{price }\end{array}\}\text{=}\left(\begin{array}{l}\text{Stand}-\text{alone selling price purchased product }\\ \text{+ Stand}-\text{alone selling price of discount}\end{array}\right)\\ \text{=}\$135,000+\$15,000\\ \text{=\$150,000}\end{array}$ (2)

3. Calculate the purchased product percentage:

Given,

Calculated stand-alone selling price of purchased product is $15,000 (1)

Stand-alone selling price of loyalty point is $135,000.

Now, calculate the purchased product percentage:

$\begin{array}{c}\text{Purchased product}=\frac{\text{Stand}-\text{alone selling price of purchased product }}{\left(\begin{array}{l}\text{Stand}-\text{alone selling price of purchased product }\\ \text{+ Stand}-\text{alone selling price of loyalty point }\end{array}\right)}\\ \text{=}\frac{\$15,000}{\left(\$15,000\text{ +}\$135,000\right)}\\ \text{=}\frac{\text{\$15,000}}{\text{\$150,000}}\\ \text{=10\%}\end{array}$ (3)

4. Calculate the loyalty point’s percentage:

Given,

Calculated stand-alone selling price of purchased product is $15,000 (1)

Stand-alone selling price of loyalty point is $135,000.

Now, calculate the loyalty point’spercentage:

$\begin{array}{c}\text{Loyalty point}=\frac{\text{Stand}-\text{alone selling price of purchased product }}{\left(\begin{array}{l}\text{Stand}-\text{alone selling price of purchased product }\\ \text{+ Stand}-\text{alone selling price of loyalty point }\end{array}\right)}\\ \text{=}\frac{\$135,000}{\left(\$15,000\text{ +}\$135,000\right)}\\ \text{=}\frac{\text{\$135,000}}{\text{\$15,000}}\\ \text{=90\%}\end{array}$ (4)

5. Calculate the selling price of purchased product:

Given,

The transaction price is $135,000

Calculated purchased product percentageis 10%.

Now, calculate the sellingprice of purchased product:

$\begin{array}{c}\text{Selling price of purchased product=}\left(\begin{array}{l}\text{Transaction price }\\ \text{× Discount percentage }\end{array}\right)\\ \text{=\$135,000×10\%}\\ \text{=\$13,500}\end{array}$ (5)

6. Calculation of selling price of loyalty points:

Given,

Transaction price is $135,000

Calculated loyalty points percentageis 90%.

Now, calculate the sellingprice of loyalty points:

$\begin{array}{c}\text{Selling price of loyalty points =}\left(\begin{array}{l}\text{Transaction price }\\ \text{× Keyboards percentage }\end{array}\right)\\ \text{=\$135,000×90\%}\\ \text{=\$121,500}\end{array}$ (6)

Conclusion

Therefore, the journal entry for sales made by S Club is recorded.

Requirement – 2

To determine

To prepare: The journal entry of S Club to record August month sales.

Answer to Problem 5.4P

Journal entry for August month is as follows:

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Cash $\left(\text{\$60,000}\times 75\text{\%}\times \text{80\%}\right)$		$36,000
	Account receivable $\left(\text{\$60,000}\times 25\text{\%}\times \text{80\%}\right)$		$12,000
	Deferred revenue – coupon book		$10,800
	Sales revenue			$58,800
	(To record service performed)

Table (2)

Explanation of Solution

• Cash is an asset, and it increases the value of asset by $36,000, hence debit the cash for $36,000.
• Accounts receivable is an asset, and it increases the value of asset by $12,000, hence debit the accounts receivable for $12,000.
• Deferred revenue – purchased product is a liability, and it decreases the value of liability by $10,800, hence credit the deferred revenue for $10,800.
• Deferred revenue – loyalty point is a liability, and it increases the value of liability by $58,800, hence credit the deferred revenue for $58,800.

Working notes:

Calculate the value of deferred revenue

Given,

Calculated selling price of purchased product is $13,500

Revenue recognized percentage is 80%.

Now, calculate the deferred revenue:

$\begin{array}{c}\text{Deferred revenue =}\left(\begin{array}{l}\text{Selling price of purchased product}\\ \times \text{ Revenue recognized percentage}\end{array}\right)\\ \text{=}\$\text{13},\text{5}00\times \text{8}0\%\\ =\$10,800\end{array}$ (7)

Conclusion

Therefore, the journal entry for sales made in the month of August by S Club is recorded.