BoTeck is a full-service technology company. It provides equipment, installation services, and training services. Customers can purchase any product or service separately or as a bundled package. On May 3, Box-Rite Corporation purchased computer equipment, installation, and training for a total cost of $120,000. Estimated stand- alone fair values of the equipment, installation, and training are $75,000, $50,000, and $25,000 respectively. The transaction price allocated to equipment, installation and training is
A) $75,000, $50,000, and $25,000 respectively.
B) $60,000, $40,000 and $20,000 respectively.
C) $40,000, $40,000, and $40,000 respectively.
D) $120,000 for the entire bundle.

Question

Quizplus · Accepted Answer

The transaction price should be allocated based on the stand-alone selling prices of each component. The total stand-alone fair values are $150,000 ($75,000 + $50,000 + $25,000). The ratio of each component's fair value to the total fair value is used to allocate the $120,000 transaction price: Equipment ($75,000/$150,000 = 50%), Installation ($50,000/$150,000 = 33.33%), and Training ($25,000/$150,000 = 16.67%). Therefore, the allocation is $60,000 (50% of $120,000) for equipment, $40,000 (33.33% of $120,000) for installation, and $20,000 (16.67% of $120,000) for training.

BoTeck Is a Full-Service Technology Company