On December 2, a customer signs a contract to buy an equipment and service plan

Question

On December 2, a customer signs a contract to buy an equipment and service plan bundle with cash. The equipment normally sells for $210 and is bundled with an 18-month service plan, which usually sells for $60 per month. The price for the bundle is $1080 and the cost of the equipment to Smart Touch is $120. Smart Touch uses the perpetual inventory method and a relative sales value basis approach to allocate revenue between the equiment and the service plan. Round intermediary values to one decimal place and round final values to the nearest whole dollar.

Explanation / Answer

Allocation of revenue in case of bundle contracts:

Fair value of the contract:

In normal conditions 1290 is the value of the contract.

Allocation of fair value to elements in the contract:

Weights of elements to bundle on the basis of its maket value arrived as above,

now allocatin of bundle price of 1080 according the weights:

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