hello from a new user, have a Becker's prob:

Dunne Co sells equpment svc contracts that cover a two year period. The sales price of each contract is $600. Dunne's experience is that, of the total dollars spend for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the 2nd contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its Dec 31 B/S, what amount should Dunne report as deferred service contract revenue?

The answer is $480K - current year deferral of all $600K is reduced by a cryptic formula - take 40% of the 600K and multiply by .5 since this is the "average" throughout the year.

But hold on, say I! If I'm telling you about the B/S at the end of the year (12/31/x1, which you'll note is poorly identified in the question), we have already incurred approx 40% of the total service costs! I would think that the answer should be $360K?

Thanks for the response!

Does it matter that they don't tell me which year? in other words would you expect the same answer if the question was year 2 vs year 1, assuming they flat-load contracts? then i would have the 60% from year 1 plus the 40% from year 2, which i imagine would all be divided by 2 to be mathematically consistent? i might just have to build a deferral waterfall to prove this to myself...

I guess the message is assume an even spread from the year 1 ratios, and then divide by two to represent an average...thanks again