ExpertMedium1 markMultiple Choice
CPA · Question 40 · Area 3: Technical Accounting and Reporting
A company enters into a contract to sell a product and provide maintenance for 2 years. <br/>Product Price: $1,000<br/>Maintenance Value: $200<br/>Total Contract: $1,100<br/><br/>How is the transaction price allocated?
A company enters into a contract to sell a product and provide maintenance for 2 years. <br/>Product Price: $1,000<br/>Maintenance Value: $200<br/>Total Contract: $1,100<br/><br/>How is the transaction price allocated?
Answer options:
A.
Product: $1,000; Maintenance: $100
B.
Product: $900; Maintenance: $200
C.
Product: $917; Maintenance: $183
D.
Product: $1,100; Maintenance: $0
How to approach this question
1. Sum Standalone Selling Prices (SSP). 2. Calculate % of Total SSP for each item. 3. Multiply Total Contract Price by those %.
Full Answer
C.Product: $917; Maintenance: $183✓ Correct
Allocation is based on relative Standalone Selling Prices. Total SSP = $1,200. Product is 1000/1200 of value. Allocated Price = (1000/1200) * 1100 = $917.
Common mistakes
Allocating the entire discount to one item.
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