[kaaCPA]

I am using Becker and don’t understand why the answer is the answer. Why are they talking about July 1 as the average date and saying only 50% of the 40% is earned? For the record, I thought “c” was right. Can someone please help?

Question 24 of 88 for L2 –

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

AUD | 85
REG | 77
FAR | 76
BEC | 83
========
ETH | 93
State Board Application pending!

[KERI0323]

I got tripped up on this question in Becker as well. My best explanation is that the question states that the contracts are sold evenly throughout the current year which means half of them were sold after July 1. This means that the first contract year on contracts sold after the midyear (average) July 1 is actually July 1-June 30 of the following year so you can only recognize 50% of the 40% incurred. I tried to compare this type of question to the depreciation and bond interest problems when they try to trick you with the dates. Hope this helps!

BEC 10/11/2010 77
AUD 11/30/2010 81
REG 02/25/2011 78
FAR 11/28/2011 74,68, 83 and DONE!!! NTS LA #460

[ScruffMcGruff]

It's because you don't have an actual breakdown of when the service contracts were sold during the year, instead it just says ‘they were distributed evenly throughout the year'.

Like they say in the answer, if they are distributed ‘evenly throughout the year', then the average start date would be halfway through the year (July 1). So assuming ALL 1,000 contracts begin on July 1, you could then say that only 50% of the repairs done within one year of a customer purchasing the contract would fall into the current year. This is how they got the 1/2 of 40% (which was $120,000 –> 1,000 x $600 x 40% x 0.5).

After that, all you need to do is add up the revenue that WON'T be earned this year, which is the $120,000 (mentioned above) and the 60% of repairs earned in the second year of the contract (which turns out to be $360,000 –> 1,000 x $600 x 60%), which totals to $480,000.

AUD - 85
FAR - 78 (lol@ FAR Sims)
REG - 85
BEC - August

[Joe36y]

Like Kerio said. For contract services sometimes it is difficult to measure revenue as you will see in the upcoming sections with cost of completion method for contract services.

So in this problem they give you the assumption that the contract revenue can be easily measured and will occur evenly throughout both years. As a result, you defer half of the first year ( since you recognized half of the revenue) and all the the second year revenue as stated in the explanation.

BEC: 82
FAR: 79
AUD: 85
REG: July 10th

[Megan]

That question tripped me up every single time I did it. I think I had nightmares about it.

BEC 52, 61, 74, 77
AUD 80
REG 75
FAR 50, 60, 70, 74, 83...DONE!!
..Texas.. Baby #2 born 4/11/11

[kaaCPA]

Thanks, guys. I *think* I get it.

AUD | 85
REG | 77
FAR | 76
BEC | 83
========
ETH | 93
State Board Application pending!

[pattibelle]

That was question has got me twice now! Glad I'm not the only one

AUD - 89
REG - 79
FAR - 82
BEC - 84

[zunairullah]

Evenly year means per month, 83 contract per month (1000/12). The question says that %40 incurs first years it actually means that for example 83 contracts sold in Oct month is 3 months old, therefore its 40% cost will be incurred in next twelve month. so if we apply accrual concept on Oct month, 4980 revenue (83*600*0.4/12*3) is recognized the rest 14940 is deffer (83*600*.4/12*9). if you apply these calculation for every month you will have accurate figure of 490360 that is more near to examiner answer b., 480000

[kdcpa]

Please explain me this question of adjusting journal entry:

Aneen’s Video Mart sells one- and two-year mail order subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:

2011 2012
Sales $420,000 $500,000
Less cancellations $20,000 $30,000
Net sales $400,000 $470,000

Subscriptions expirations:
2011 $120,000
2012 $155,000 $130,000
2013 $125,000 $200,000
2014 $140,000
$400,000 $470,000
In Aneen’s December 31, 2012 balance sheet, the balance for unearned subscription revenue should be

a. $495,000
b. $470,000
c. $465,000
d. $340,000

Answer:
(c) At 12/31/12, the liability account unearned subscription revenue should have a balance which reflects all unexpired subscriptions. Of the 2011 sales, $125,000 expires during 2013 and would still be a liability at 12/31/12. Of the 2012 sales, $340,000 ($200,000 + $140,000) expires during 2013 and 2014, and therefore is a liability at 12/31/12. Therefore, the total liability is $465,000 ($125,000 + $340,000). This amount would have to be removed from the sales account and recorded as a liability in a 12/31/12 adjusting entry.

[lam2848]

Hi kdcpa. So theres two ways to solve this question (a long way and a short way). The long way is with T accounts.

So in year one we have total sales of $420K which will be a credit to unearned revenues. In that year $20K was canceled and $120K expired (debit to unearned revenue), leaving a year 1 ending balance in unearned revenue of $280K (420-20-120 = 280). So the beginning balance in unearned revenue for year 2 is $280K. Then in year 2 we had additional sales of $500K which will be a credit to unearned revenue. In year 2 there were $30 of canceled sales and $285 expired (155+130), which will be recorded as a debit to unearned revenue. So that leaves a balance of $465 in unearned revenue for year 2 (280+500-30-285 = 465).

The easy way to do it is just add the amount of sales that are not yet expired (140+200+125 = 465).

Hope that helps!

[Author]

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