A company enters into a contract to sell a product and provide maintenance for 2 years. Product Price: $1,000 Maintenance Value: $200 Total Contract: $1,100 How is the transaction price allocated?

Answer options:

Product: $1,000; Maintenance: $100

Product: $900; Maintenance: $200

Product: $917; Maintenance: $183

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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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?

How to approach this question

Full Answer

Common mistakes

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