Accounting SmartBook Practice Test

When standalone selling prices are observable, you allocate the total transaction price to each performance obligation in proportion to its stand-alone price. In other words, each obligation receives a share of the transaction price equal to its stand-alone price divided by the sum of all stand-alone prices, times the total price.

For example, if there are two obligations with stand-alone prices of 100 and 50, and the total transaction price is 120, the first obligation would be allocated 120 × (100/150) = 80, and the second would receive 40. This approach reflects the value customers place on each obligation and ensures the revenue recognized for each obligation aligns with what it would be worth if sold separately.

Other methods don’t fit when stand-alone prices are observable: allocating equally ignores relative value, allocating by the order of obligations has no price basis, and allocating by cost to fulfill uses internal costs rather than the price customers would pay.