[K]

Hi,
I am studying for FAR and so far the information seems to be understandable my only issue is with solving some mcq. How do I know when I should consider the time? For example, when solving a problem sometimes you take the cost multiply the % and sometimes you have to take the cost multiply the % and multiply the amount of time (6/12 if the first payment is in July.) Sorry I don’t have an actual example if I come across it again I will post it as well.

[K]

I know it may be indirectly said in the question. So what hints or key words should I look for?

[K]

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.
$360,000

b.
$300,000

c.
$540,000

d.
$480,000

I selected $360,000 taking 1000x$600=$600,00 x 40% = $240,000 then I took $600,000- 240,000 = 360,000. The questions doesn't mention July so how would I have known to then multiply by 1/2???

Explanation
Choice “d” 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

[wombataholic]

To answer your questions from your first and second posts, the keywords/phrases on deferred revenue questions are almost always going to be “evenly throughout the year” or something similar. If the question mentions when the contract/subscription was sold, that is the giveaway that some of the revenue will be deferred.

To answer your question about Dunne Co., since the contracts are sold evenly throughout the year, half of them are still in year 1 of the contract at the end of the year, the other half are rolling over to year 2, so the year 1 revenue on the ones rolling over is recognized.

Total Revenue: 600,000
Year 1 contracts rolling over to year 2: 50%
Percentage of revenue recognized in year 1 of contract: 40%
Earned Revenue: 600,000 * 50% * 40% = 120,000
Deferred Revenue: 600,000 – 120,000

Licensed CPA
Passed each section on the first try with Ninja Notes/MCQ/Audio

[vodrldnr]

adding some concept for you..9

Revenue is basically recognized when it is earned (sell product or service) and realized or realizable.

normally on sales basis, revenue is recognized following its revenue recognition criteria which is mentioned above. lets say a company sell a physical product like laptop. then the company recognize sale at the time when they sell it.

but what if a company sell or provide “service” ?

service is, in almost all cases, is provided over the period time. then how will you recognize it ? when earned and realized or realizable ? yes but the service will be provided every sec, ever min, hour day …….. Accountant cannot prepare or adjust there F/S on that every min, sec, hourly basis. that is just impossible to do so.

in this sense, the concept of deferral and accrual arises.

by using the deferral and accrual, accountant can recognize revenue which is earned period of time.

since a lot of areas in business worlds have been developed, it become difficult just to recognize revenue on the point of sales. as a result, a lot of exception for the general rule have been created such as installment method, cost recovery etc .

[Author]

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