Summary Business Accounting

Question:

Orange, Inc., sells a LearnIt-Plus software package that consists of their normal LearnIt math tutorial

program along with a one-year subscription to the online LearnIt Office Hours virtual classroom. LearnIt

Plus retails for $200. When sold separately, the LearnIt math tutorial sells for $150, and access to the

LearnIt Office Hours sells for $100 per year. When should Orange recognize revenue for the parts of this

arrangement? Would your answer change if Orange did not sell the LearnIt Office Hours separately,

butbelieved it would price it at $100 per year if they ever decided to do so?



Answer:



Orange has separate sales prices for the two parts of LearnIt-Plus, so that vendor-specific objective

evidence (VSOE) allows them to allocate revenue to those parts according to their relative selling prices.

LearnIt will be allocated $200 x [$150 ÷ ($150 + 100)] = $120, and that revenue will be recognized upon

delivery of the LearnIt software. LearnIt Office Hours will be allocated $200 x [$100 ÷ ($150 + 100)] =

$80, and that revenue will be deferred and recognized over the life of the one-year period in which the

Office Hours are delivered.

If LearnIt were not sold separately, Orange would not have VSOE for all of the parts of the contract. In

that case, revenue would be delayed until the later part was delivered. In this case, the $200 would be

deferred and recognized over the life of the one-year period in which the Office Hours are delivered.