[Oimie]

NINJA Question –

So the first time I encountered an “evenly throughout the year” problem, I learned that you have to divide it by 2 and assume that half occurs during the first year and the other half occurs during the second year. (I still do not know the logic for this till this day.) But now I encountered another “evenly throughout the year” problem that doesn’t require the amount to be divided in half. So what’s up with that? Here are the two examples and explanations:

#1. 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?

Answer: $480,000

40% is incurred evenly throughout the first year.

40% of the $600,000 is $240,000

$240,000 >>DIVIDE BY 2<< = $120,000

So $480,000 is deferred

#2. Winn Co. sells subscriptions to a specialized directory that is published semiannually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cutoff dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred subscription revenue. Data relating to 20X1 are as follows:

Deferred subscription revenue (January 1, 20X1): $ 750,000

Cash receipts from subscribers: 3,600,000

In its December 31, 20X1, balance sheet, Winn should report deferred subscription revenue of:

Answer: $900,000

Simply 3/12 x $3,600,000.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Missy]

.Cash received after 9/30 isn't going to be recognized as revenue until the next publication. So any October, November or December (3 months out of 12l) cash receipts are liabilities on the balance sheet until the next publication date.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Oimie]

@mla11692: Thanks for reply! And yes, I understand that, but my question is why didn't they divide $3,600,000 by 2 before they multiplied it by 3/12.

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Missy]

In this case, revenue is recognized on two very specific dates, April 15 and October 15. So whatever cash is collected from Oct 1-Mar 30 is recognized on April 15 and whatever is collected April 1-Sept 30 is recognized on Oct 15. That is how subscriptions work.

Evenly throughout the year does not automatically translate to divide by 2; In some cases that is true but you need to be able to analyze what the question is asking you also. There are very few hard and fast rules you can apply to every single question or phrase.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[jtavants]

I agree that the logic used in the first problem is a little wonky. You just have to assume that the average number of contracts outstanding throughout year 1 is 500 (total contracts sold during the year divided by 2). This is the only method that results in one of the possible answers. It's also probably the most accurate. When dividing by 2 and getting the average, you are basically making the accurate assumption that contracts sold earlier in the year will be subject to more service repairs than contracts sold at the end of the year.

Although the second question talks about “evenly throughout the year”, it's a different type of question. In this question, “evenly throughout the year” just lets us know that we have received $300,000 in subscription payments from customers each month of the year ($3,600,000/12). All of these receipts except for the receipts in October, November, and December can be recognized as revenue since the obligations of those receipts were met on April 15 and October 15. Receipts for October-December cannot be recognized as revenue until the next publication date of April 15, year 2.

FAR -- 88 (4/21/15)
AUD -- 94 (7/20/15)
BEC -- 85 (8/13/15)
REG -- 85 (10/20/15)

I'm done!

Texas CPA

[Oimie]

@mla11692 & @jtavants: Thank you my beautifuls 🙂 Guess I must assess the story instead of just jumping into it dividing by 2 xD

FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016

[Author]

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