An entity enters into a bundled arrangement to provide a customer with a software license, installation services, and post-contract support for a total price of $150,000. The standalone selling prices for the installation and support are observable at $20,000 and $30,000, respectively. The standalone selling price of the software license is highly variable and not directly observable.
Using the residual approach to allocate the transaction price, what amount of revenue should be allocated to the software license?
- $100,000 (correct answer)
- $120,000
- $130,000
- $150,000
Explanation: The residual approach can be used to estimate a standalone selling price when it is not directly observable. The entity allocates the residual amount of the transaction price to the good or service with the unobservable price. Here, the transaction price is $150,000. The observable standalone prices are $20,000 (installation) and $30,000 (support). The residual amount allocated to the software license is $150,000 - $20,000 - $30,000 = $100,000.