[pmarsocci]

I would call the company where i bought my materials but I am outside the window for “question support”.

Here the Question:

PM Corp. sells equipment service contracts that cover a 2 years period. The sales price for each contract is $600. Pm’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly throughout the 1st year and 60% evenly during the 2nd contract year. PM sold 1,000 contracts evenly throughout the current year. In Pm’s 12/31 balance sheet, what amount should PM report as deferred contract revenue?

A) $540,000 B) $480,000 C) $360,000 D) $300,000

Scroll down for correct answer….

I though without a doubt the answer was $360,000 (C), but i was incorrect as the materials say the answer is $480,000 (B).

Explanation… When service contracts are sold, the entire proceeds are reported as referred revenue. Revenue is recognized, and the deferral is reduce as services are performed. Since repairs are made evenly (July 1st is average date), only 1/2 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

They also include why the other answers are incorrect but the info given is the same as the explanation of the answer.

Thanks in advance for any input….

Maybe just a typo or something (I am hoping)///lol

[UCMCPA]

Not sure what is confusing, if you read through the question and the answer, you can see where everything comes from.

You recognized the full 40% as earned instead of just half. With using the estimate you have to reduce. Hypothetically speaking, something you sold in Nov, Year 1 may or may not have been earned by Dec 31, Year 1.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[UCMCPA]

Not sure what is confusing, if you read through the question and the answer, you can see where everything comes from.

You recognized the full 40% as earned instead of just half. With using the estimate you have to reduce. Hypothetically speaking, something you sold in Nov, Year 1 may or may not have been earned by Dec 31, Year 1.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[Anonymous]

@pmarsocci – There is still $360,000 remaining for the first year ($600,000 X 60%) because only 40% would have been incurred/earned by 12/31, and the entire $120,000 for the second year is still outstanding too.

[Anonymous]

@pmarsocci – There is still $360,000 remaining for the first year ($600,000 X 60%) because only 40% would have been incurred/earned by 12/31, and the entire $120,000 for the second year is still outstanding too.

[mjp44]

When recognizing revenue for service, the revenue should be recongnized evenly over the course of the service period. In this case, the first year sold $600K worth of contracts. Disregarding the % incurred for a second, $300k should be deferred – recoginize half of the revenue in yr 1. But since past experience shows they generally only do 40% of the work in yr 1 and the rest in yr 2, only 40% of the the revenue (120K) should be recognized and rest (480K) should be deferred.

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[mjp44]

When recognizing revenue for service, the revenue should be recongnized evenly over the course of the service period. In this case, the first year sold $600K worth of contracts. Disregarding the % incurred for a second, $300k should be deferred – recoginize half of the revenue in yr 1. But since past experience shows they generally only do 40% of the work in yr 1 and the rest in yr 2, only 40% of the the revenue (120K) should be recognized and rest (480K) should be deferred.

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[UCMCPA]

So, mjp44.

What number are you multiplying 40% by to get 120,000, cause it's surely isn't the 600k revenue.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[UCMCPA]

So, mjp44.

What number are you multiplying 40% by to get 120,000, cause it's surely isn't the 600k revenue.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[mjp44]

300K… the amount of revenue they should be recognizing without knowing the historical %s

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[mjp44]

300K… the amount of revenue they should be recognizing without knowing the historical %s

FAR- PASSED (11/13)
REG- PASSED (2/14)
BEC- PASSED (5/14)
AUD- PASSED (8/14)

If it's important to you, you will find a way. If it isn't, you will find an excuse.

[UCMCPA]

I guess I'm looking at it in a different way, which may be wrong. But yields me the same answer lol

“Sold evenly throughout the year”, would mean you average, or take half of the normal recognized 40%. Something you sold on Jan 1, year 1 will be recognized by the end of year. But something you sold Nov 1, Year 1 COULD be recognized by Dec 31, year 1, or Oct 31, Year 2. You're not sure when, you are only told throughout the first year of the contract, would could be in year 2.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[UCMCPA]

I guess I'm looking at it in a different way, which may be wrong. But yields me the same answer lol

“Sold evenly throughout the year”, would mean you average, or take half of the normal recognized 40%. Something you sold on Jan 1, year 1 will be recognized by the end of year. But something you sold Nov 1, Year 1 COULD be recognized by Dec 31, year 1, or Oct 31, Year 2. You're not sure when, you are only told throughout the first year of the contract, would could be in year 2.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[pmarsocci]

I AM STILL CONFUSED!!!!. Will his total revenue recog. over the 2 year period be 600k? if 40% of the revenue is recog. in year 1…why dont you just multiply 600k X 40%= 240,000 recog in year 1, with 360k being defferred to year 2..????

WHERE AM I GOING WRONG?

[pmarsocci]

I AM STILL CONFUSED!!!!. Will his total revenue recog. over the 2 year period be 600k? if 40% of the revenue is recog. in year 1…why dont you just multiply 600k X 40%= 240,000 recog in year 1, with 360k being defferred to year 2..????

WHERE AM I GOING WRONG?

[UCMCPA]

YOU'RE GOING WRONG HERE. This is how I look at it.

Read my damn post. Read it. Contact is 2 years, got it. They are NOT all sold at Jan 1 year 1. They can be sold mid-year, end of year, etc.

For those contracts sold mid-year and end of year, you will still recognize it over the 2 year CONTRACT period. So say, July 1, you sold a contract. That contact will recognize 40% on income in year one. Year one being July 1, year 1 – June 30, year 2. However, YOU”RE NOT SURE WHEN.

So you must take an avg (50%) or the regular 40% recognized, which adjusts for the fact not all contracts are sold on Jan 1, year 1.

You can think of it that way or as mjp44 explained it. The numbers yield the same result.

FAR - 84
AUD - 94
REG - 86
BEC - 86

[Author]

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