Antonio’s Car Services provides maintenance services for motorized vehicles. In March 2021, Rick placed an order for a new set of tires for $350. When a customer purchases goods or services in excess of $300, Antonio’s gives the customer a 25% discount coupon for future purchases made in the next three months. Antonio’s estimates that approximately 80% of customers utilize the coupon and that on average those customers will purchase goods or services that typically sell for $75. Required: (a) How many performance obligations are in Rick’s contract? (b) Prepare a journal entry to record revenue for this transaction, assuming that Antonio’s uses the residual method to estimate the stand-alone selling price of new tires sold without the discount coupon

There are two performance obligations in the contract namely:

The purchase of tires

Provision of discount coupon for future purchase

Based on the below calculation of discount coupon value of $15,which is the deferred revenue, the necessary journal entries are:

Dr Cash                           $350

Cr deferred revenue                      $15

Cr sales of tires($350-$15)             $335    

Explanation:

The consideration relating to the discount coupon can be computed using the below formula:

( Number of set sold ) X ( Approximate % of Customer utilize the Coupons ) x ( Average Value of Additional Purchase value) X (Discount rate)

Number of set sold is 1

approx. % of customer utilizing the coupon is 80%

average additional purchase is $75

discount rate is 25%

Discount coupon consideration=1*80%*$75*25%

                                                    =$15

statement of owner's equity;