[linkman311]

Becker Question –

Here’s the question:

“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 the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?

a. $480,000

b. $540,000

c. $300,000

d. $360,000

Explanation

Choice “a” 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 ½ of the 40% of repairs will be in the current year.

Current year deferral ($600 x 1,000) $ 600,000

Earned in the current year (600,000 x 40% x 1/2) (120,000)

Deferral 12-31 $ 480,000

Choice “b” is incorrect. 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 ½ of the 40% of repairs will be in the current year.

Choice “d” is incorrect. Since repairs are incurred evenly during the first year (July 1 is average date) only ½ of 40% will be earned in the current year.

Choice “c” is incorrect. Revenue is recognized, and deferral reduced, as the service is performed.”

Can someone explain why the 600,000 X 40% is multiplied by 1/2. I understand the midyear logic, but nowhere in the problem did it say anything about the the contracts occurring in the middle of the year so I have no idea why they just did that. It says he sold his contracts evenly, and doesn’t say he started selling them midyear so wouldn’t it make sense that he began selling them in the beginning of the year?

 

 

Confidence is a prerequisite for success

FAR - 1/1
AUD - 1/1
BEC - 1/1
REG - Q4

Have Becker, wish I got Roger

[Anonymous]

When an exam question says that something occurred “evenly” throughout the year, that is your cue to divide the answer by 2 (or multiply by .5) because it averages the payments to simulate them being made “evenly.” It kind of makes sense when you think about it, but whenever I see the word “evenly” I divide by 2 and it turns out right.. not very helpful but hopefully someone else may be able to explain better 🙂

[Anonymous]

When an exam question says that something occurred “evenly” throughout the year, that is your cue to divide the answer by 2 (or multiply by .5) because it averages the payments to simulate them being made “evenly.” It kind of makes sense when you think about it, but whenever I see the word “evenly” I divide by 2 and it turns out right.. not very helpful but hopefully someone else may be able to explain better 🙂

[Gatorbates]

It says 40% is incurred evenly throughout the year. So, for the purchased service contracts that were made from July 1 – December 31, since they were incurred evenly throughout the year, half of the services were performed in the first half (Jan 1 – June 30) of year 2.

Therefore, the deferred revenue is the entire 60% (360,000) for the second year, and half of the 40% (120,000) from the first year.

Make sense?

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

It says 40% is incurred evenly throughout the year. So, for the purchased service contracts that were made from July 1 – December 31, since they were incurred evenly throughout the year, half of the services were performed in the first half (Jan 1 – June 30) of year 2.

Therefore, the deferred revenue is the entire 60% (360,000) for the second year, and half of the 40% (120,000) from the first year.

Make sense?

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[linkman311]

Bird, thanks for the heads up. If I know what to do and don't completely understand the reasoning that's fine with me.

Thanks for the help Gatorbates, but my issue was that it never said anything about July or midyear for me to know to only account for 1/2. Doesn't evenly mean they were accounted for equally? Therefore equally would mean the same amount every month, for 12 months. “Average date” that is said in the solution makes a little more sense, but my problem is that it didn't say average date in the problem. I guess I just need to associate ‘evenly' to mean average date. It doesn't say there were 2 payments made in year 1. If it did then I wouldn't have a problem with this.

Confidence is a prerequisite for success

FAR - 1/1
AUD - 1/1
BEC - 1/1
REG - Q4

Have Becker, wish I got Roger

[linkman311]

Bird, thanks for the heads up. If I know what to do and don't completely understand the reasoning that's fine with me.

Thanks for the help Gatorbates, but my issue was that it never said anything about July or midyear for me to know to only account for 1/2. Doesn't evenly mean they were accounted for equally? Therefore equally would mean the same amount every month, for 12 months. “Average date” that is said in the solution makes a little more sense, but my problem is that it didn't say average date in the problem. I guess I just need to associate ‘evenly' to mean average date. It doesn't say there were 2 payments made in year 1. If it did then I wouldn't have a problem with this.

Confidence is a prerequisite for success

FAR - 1/1
AUD - 1/1
BEC - 1/1
REG - Q4

Have Becker, wish I got Roger

[Gatorbates]

This problem gave me fits too, and took me a while to grasp (I still don't 100%). So when they say sold 1,000 contracts evenly throughout the year, first think everything is initially booked to deferred revenue. Debit Cash 600k, Credit Def Rev 600k.

Then, when calculating the services on the contracts, since they are serviced “evenly throughout the contract”, you assume that half of the 40% that are serviced happened in year one, and the second half in year two (I assume since 1/2 were bought in the first half of the year and the other 1/2 in the second half of the year)

I hate this question, and it still gives me problems sometimes, and don't like the way it's presented in Becker. It just helped me to remember everything initially is booked to Def Rev, and then make the adjustment, assuming they know what their talking about. Not sure if this helped. It confused me even writing it. 🙂

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Gatorbates]

This problem gave me fits too, and took me a while to grasp (I still don't 100%). So when they say sold 1,000 contracts evenly throughout the year, first think everything is initially booked to deferred revenue. Debit Cash 600k, Credit Def Rev 600k.

Then, when calculating the services on the contracts, since they are serviced “evenly throughout the contract”, you assume that half of the 40% that are serviced happened in year one, and the second half in year two (I assume since 1/2 were bought in the first half of the year and the other 1/2 in the second half of the year)

I hate this question, and it still gives me problems sometimes, and don't like the way it's presented in Becker. It just helped me to remember everything initially is booked to Def Rev, and then make the adjustment, assuming they know what their talking about. Not sure if this helped. It confused me even writing it. 🙂

Licensed Florida CPA:
B: 71, 73, 79
A: 83
R: 78 (expired), 77
F: 74, 74, 80

It's finally freaking over.

[Texas CPA]

Becker uses old CPA exam questions for homework. Sometimes they even put disclaimers on the answers.

Reg - Passed 82 Nov 2012 - Becker
Aud - Passed 86 May 2013 - Becker
BEC - Passed 88 Aug 2013 - Becker
FAR - Passed 88 Nov 2013 - Becker

https://www.becker.com/cpa-review

Texas CPA

[Texas CPA]

Becker uses old CPA exam questions for homework. Sometimes they even put disclaimers on the answers.

Reg - Passed 82 Nov 2012 - Becker
Aud - Passed 86 May 2013 - Becker
BEC - Passed 88 Aug 2013 - Becker
FAR - Passed 88 Nov 2013 - Becker

https://www.becker.com/cpa-review

Texas CPA

[Author]

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