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. Find What Cash, Unearned Revenue, and Merchandise Sales Revenue is? I got Cash at 1080, but I cannot figure out how to calculate the other two.

Explanation / Answer

Answer:-

The equipment selling value is $210 and service plan is $1080 (=$60 x 18 months), hence total bundle cost should be $1290 ($210 + $1080).

With the pricing of bundle at $1080 but actual selling value being $1290, hence Unearned revenue is $210 (=$1290-$1080).

But the bundled is priced at $1080 and equipment cost to company is $120 which means service plan revenue is $960 (=$1080-$120) and per month revenue is at $53.3 per month (=$960/18)).

The inventory recording is perpetual inventory system hence it will record transaction as it takes place hence revenue earned is recorded as $1080 immediately and doesn't wait for service plan period of 18 months. This can allow to record the unearned revenue of $210 as DISCOUNT, that is the bundle was sold at $210 discount at the time of sales. This discount should be considered as Merchandise Strategy thereby marking the sales as Merchandise Sales Revenue. Hence, the Merchandise Sales Revenue is $1080.

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