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Subject Topic: FAR - Deferred Revenue (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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dlwtistyle
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Posted: 25 Jun 2008 at 16:48 | IP Logged  

Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout 1992. In its December 31, 1992, balance sheet, what amount should Dunne report as deferred service contract revenue?

a. 540k

b. 480k

c. 360k

d. 300k

 

Choice "b" is correct. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly (July 1 is average date), only of the 40% of repairs will be in 1992.

 

1992 deferral ($600 x 1,000) $ 600,000

Earned in 1992 (600,000 x 40% x 1/2) (120,000)

Deferral 12-31-92 $ 480,000

 

Where the hell are they getting this 1/2 July 1 avg date?  this is the 2nd or third time it has showed up in the hwmk yet the textboook does not mention 1 word of it.

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try2pass
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Posted: 25 Jun 2008 at 16:51 | IP Logged  

I had this exact question.  i don't understand why it's done this way, but i do understand that they assume half the contracts are bought the first half of the year, and half the second, for an average date of July 1.  that's as much as i understand.  i think it's enough to get through the question, though.

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BEC--82
AUD--88
FAR--88
REG--83
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ilcpa2008
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Posted: 25 Jun 2008 at 18:33 | IP Logged  

I wouldn't get too hung up on the "average date" part. The question says that they sold contracts evenly throughout 1992. Basically, you just have to understand that since the contracts were sold throughout the year, not just all at January 1, that not all of them have been outstanding for a year, so they haven't yet earned the full 40% of the revenue.

Think about it - a contract sold on Jan 1 would have earned the full 40% of revenue, a contract sold on Dec 31 would not have earned any revenue, and a contract sold on July 1 would have earned 1/2, or 20%, of the revenue. On average 20% of the revenue has been earned on all of the contracts.

I know that's a long response, but hopefully it makes sense :)



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FAR (7/1)
REG (7/29)
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moonman711
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Posted: 26 Jan 2010 at 22:16 | IP Logged  

Nice explanation, thanks!
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donkiluminate
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Posted: 09 Mar 2010 at 21:34 | IP Logged  

Nice explanation.  That really threw me for a loop last night.
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