CPAnet Forum: Deferred Revenue

Active Topics

Memberlist

Help

FAR STUDY GROUP
CPAnet Forum : FAR STUDY GROUP

Topic: Deferred Revenue (

Topic Closed)

Author

Message

<< Prev Topic | Next Topic >>

topmind10
Newbie
Newbie

Joined: 29 Oct 2010
Online Status: Offline
Posts: 6

Posted: 29 Oct 2010 at 22:00 \| IP Logged

Dunne Co. Sells equipments service contract that cover a two-year period. The sales price of each contract is $600. Duune's pas experiences 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 the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?
a. $540,000
b. $480,000
c. $360,000
d. $300,000

Explanation:
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 1/2 of the 40% of repairs will be in the current year.

Current year deferral ($600x1,000)                $600,000
Earned in the current year (600,000x40%x1/2)     (120,000)
Deferral 12-31         & amp; nbsp;         & amp; nbsp;         & amp; nbsp;      $480,000

I have no idea what " July 1 is average date" mean. ALSO what does it mean "evenly"? I didn't get it at all. Anyone can help? Thanks a million.

tetsuwangatomu
Regular
Regular

Joined: 08 Oct 2010
Location: United States
Online Status: Offline
Posts: 133

Posted: 30 Oct 2010 at 00:21 \| IP Logged

ilcpa2008

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 :)

==
Found it online: Nice explanations too.

--

__________________
Work Harder, that's all.
Don't post copyrighted stuff that we don't own here.

Search for other posts by tetsuwangatomu

topmind10
Newbie
Newbie

Joined: 29 Oct 2010
Online Status: Offline
Posts: 6

Posted: 30 Oct 2010 at 20:51 \| IP Logged

Wow, that was a long explanation. But thank you very much although I am still little confused.

tetsuwangatomu
Regular
Regular

Joined: 08 Oct 2010
Location: United States
Online Status: Offline
Posts: 133

Posted: 30 Oct 2010 at 22:06 \| IP Logged

How to recognize deferred revenue

__________________
Work Harder, that's all.
Don't post copyrighted stuff that we don't own here.

tetsuwangatomu
Regular
Regular

Joined: 08 Oct 2010
Location: United States
Online Status: Offline
Posts: 133

Posted: 30 Oct 2010 at 22:49 \| IP Logged

Let's rephrase this question to beat it to death to make sure it's not back in our nightmare:

Dunne Co. Sells equipments service contract that cover a two-year period. The sales price of each contract is $600. Duune's pas experiences 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 the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?
a. $540,000
b. $480,000
c. $360,000
d. $300,000

==Rephrase:
Dunne sold 1,000 contract evenly throughout current year (1/1/2010-12/31/2010). Which means we can use average date to figure out 1st year (1/2 of contract) and 2/2=1 for 2nd Year.
Just like we are using average inventory balance to figure out inventory turnover.

J/E's
12/31/2010
Dr. Cash 600,000
Cr. Deferred Rev 600,000

1/2 Recognized Revenue on contract covering 1/2 of period:
Dr. Deferred Rev 120,000
Cr. Earned Rev     120,000 (Since average contract only performed for half contract period)

12/31/2011

Dr. Deferred Rev 120,000 (Recog remaining 1st yr leftover contract)
Cr. Earned Rev     120,000

Dr. Deferred Rev 180,000 (all contract sold in 1st yr, 1/2 avg expired)
Cr. Earned Rev     180,000

7/1/2012
Dr. Deferred Rev 180,000 (all contract sold in later months in 1st yr expired)
Cr.   Earned Rev     180,000

I bet this question is worth 10 points on the real exam.

__________________
Work Harder, that's all.
Don't post copyrighted stuff that we don't own here.

Sorry, you can NOT post a reply.
This topic is closed.

Printable version

You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum