What is the amount of revenue recorded by Eagle Inc. in May for the sale of apparel, and how much revenue is deferred for customer options involving a coupon promotion?
The amount of revenue recorded by Eagle Inc. in May for the sale of apparel is $240,000. The revenue deferred for the customer options (coupon promotion) is $0.
Data and Calculations:
Sales of apparel to customers in May 2020 = $240,000
Coupons for 30% off purchases in June and July = 2,400
Standalone selling price of the apparel = $240,000
Standalone selling price of the coupons expected to be redeemed = $36,000 (1,200 * $30)
Explanation:
a) The amount of revenue to record in May for the sale of apparel equals $240,000. The coupon expense of $36,000 will not be recognized by Eagle Inc. until the coupons are redeemed or used because the coupons were given to induce future purchases and not for the past purchase of apparel.
Final answer:
For the apparel sold in May, Eagle Inc. should recognize $208,689 in revenue. The remainder, $67,311, would be deferred and considered as revenue for June and July 2020 as the coupons are redeemed.
Explanation:
In financial accounting, when it comes to recognizing revenue, it's necessary to allocate the transaction price between different performance obligations. In this case of Eagle Inc., the sales transaction in May involved not only the selling of apparel but also granting coupons as part of the deal. Both these are considered separate performance obligations.
First, we need to calculate the transaction price which equals the standalone selling price of the apparel ($240,000) plus the standalone selling price of the coupons ($36,000), giving a total of $276,000.
Next, we allocate the transaction price proportionally. The ratio of the standalone selling price for apparel to the total standalone selling price is $240,000/$276,000 = 0.8695 (or 86.95%). Thus, the revenue for May regarding apparel sales would be $240,000*0.8695 = $208,689.
The rest, $67,311 ($276,000 - $208,689), would be considered as deferred revenue for the coupon promotion to be recognized in June and July 2020 when the coupons are redeemed.