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pgupta
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Joined: 25 Jan 2011
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Posted: 15 Feb 2011 at 22:43 \| IP Logged

Hi All,

I have a question on the Service contracts example provided in the Becker
2011 text book of F6 - Pg 34.

Brook Company offers service contracts on the major appliances it sells
for a one-year, two- year or three- year period. Cash receipts from
contracts are credited to the unearned service contract revenue account
which had an unadjusted balance of $1,200,000 at December 31, Year 1,
before year-end adjustment . Service contract costs are charged to
expense as incurred. This account totaled $250,000 at December 31, Year
1.
Outstanding service contract s at December 31, Year 1, expire as follows:
During Year 1: $250,000
During Year 2: $270,000
During Year 3: $420,000
What amount should Brook report as unearned service contract revenue at
December 31, Year 1?

Answer:
$250,000 + $270,000 + $420, 000 = $940,000

My question: Can someone please explain the why are we adding up the 3
numbers above to derive at the balance?

Thanks for your help!

shimc213
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Joined: 16 Feb 2011
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Posted: 16 Feb 2011 at 21:03 \| IP Logged

I was just wondering the same thing.

Aznanalyst83
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Joined: 10 May 2009
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Posts: 241

Posted: 17 Feb 2011 at 14:16 \| IP Logged

This is weird, shouldn't it be 250K? I mean, technically, each year the contract expires, it should reduce unearned revenue by that much...

My guess perhaps it is a typo asking what it should be @ year 3?

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