[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]

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

[pmarsocci]

thanks everyone…i guess i understand it a little better… just out of curiuosity…what would be the amt recog and deferred aqt the end of year 2?

[pmarsocci]

thanks everyone…i guess i understand it a little better… just out of curiuosity…what would be the amt recog and deferred aqt the end of year 2?

[nbad311]

@pmarsocci , no input from me but just coming in to say that I would have said it was the $360K also and I don't comprehend the correct answer even with the answer being explained to us IN ALL CAPS

REG - 65, 70, 80!
BEC - 35, 62, 79!
AUD - 73, 75!
FAR - 65, 73, 70, 75! DONE.

[nbad311]

@pmarsocci , no input from me but just coming in to say that I would have said it was the $360K also and I don't comprehend the correct answer even with the answer being explained to us IN ALL CAPS

REG - 65, 70, 80!
BEC - 35, 62, 79!
AUD - 73, 75!
FAR - 65, 73, 70, 75! DONE.

[leocpa1946]

I guess the assumption here is that the amount of revenue in year 1 is 120000, year 2 is 360000 and year 3 is 120000. Is that correct ???

[leocpa1946]

I guess the assumption here is that the amount of revenue in year 1 is 120000, year 2 is 360000 and year 3 is 120000. Is that correct ???

[mjp44]

Whenever your recognizing revenue for a service contract, you always recoginize revenue evenly over the life of the service.

Dont even look at the 40% or 60% yet. Thats just to confuse you. You first have to see how much revenue the company is recongizing each year. They are recognizing $300,000 each year. Total contract = $600,000/ 2 years = $300,000.

Now, historically the company knows that in the first year of work they only do 40% (of 300K not 600K) of the work. Therefore you need to defer part of that $300,000 because only 40% of the work is being done in yr 1. If it said that historically they do 100% of the work in year 1 you recognize all of the 300K.

I think the confusion is that you are not splitting the total revenue by the number of years of service first before adjust for the 40%/60%. This % of expense incurred for service is a % of $300,000 not $600,000.

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]

Whenever your recognizing revenue for a service contract, you always recoginize revenue evenly over the life of the service.

Dont even look at the 40% or 60% yet. Thats just to confuse you. You first have to see how much revenue the company is recongizing each year. They are recognizing $300,000 each year. Total contract = $600,000/ 2 years = $300,000.

Now, historically the company knows that in the first year of work they only do 40% (of 300K not 600K) of the work. Therefore you need to defer part of that $300,000 because only 40% of the work is being done in yr 1. If it said that historically they do 100% of the work in year 1 you recognize all of the 300K.

I think the confusion is that you are not splitting the total revenue by the number of years of service first before adjust for the 40%/60%. This % of expense incurred for service is a % of $300,000 not $600,000.

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.

[Whopper Warrior]

Buckle up, its going to be a bumpy ride.

We sold 600 contracts at a thousand a piece for $600,000 evenly throughout the year, or $50,000 a month. Our service contracts last two years with 40% being earned in YR 1, and 60% being in YR 2. So lets break it down (month by month):

Month Fraction x Contract * Earning percent = Earned

1 (11.5/12) x 50k x .4 = 19.16k

2 (10.5/12) x 50k x .4 = 17.5k

3 (9.5/12) x 50k x .4 = 15.83k

4 14.16k

5 12.5k

6 10.83k

7 9.17k

8 7.5k

9 5.83k

10 4.17

11 2.5

12 (.5/12) * 50 * .4 = .83

Recognized Revenue 120.08 (.08 is a rounding error, or not). To find the fraction we take Months in Year – Month + 1/2 a month. This is because in say January we sell a contract on Janaury 1st , 2nd. 3rd…31st. Now if we put that perspective onto a year ((1/365) + (n/365) + 1) / 365) you end up with .5 which is a shortcut.

Now if we recognized 120k in YR 1 we must defer 480k for YR 2 and beyond (answer B)

To answer your second question, assuming no new contracts / data we would take 600k *.6 * .5 or 180k (first 6 mos of sale) and and additional 120k for 600*.5*.4 (last 6 mos of sale_. So in YR 2, we would recognize 300k worth of contracts, and then in YR 3, we would recognize the remainder 180k (600 * .6 * .5) (last 6 mos of sale)

Again this has to do with the fact that sales were even. In YR 2, half the sales would be entering the 60% mark, while the other half would still be 40%. In YR 3, only the latter half of sales would still be being earned at 60%.

I hope this clarifies.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Whopper Warrior]

Buckle up, its going to be a bumpy ride.

We sold 600 contracts at a thousand a piece for $600,000 evenly throughout the year, or $50,000 a month. Our service contracts last two years with 40% being earned in YR 1, and 60% being in YR 2. So lets break it down (month by month):

Month Fraction x Contract * Earning percent = Earned

1 (11.5/12) x 50k x .4 = 19.16k

2 (10.5/12) x 50k x .4 = 17.5k

3 (9.5/12) x 50k x .4 = 15.83k

4 14.16k

5 12.5k

6 10.83k

7 9.17k

8 7.5k

9 5.83k

10 4.17

11 2.5

12 (.5/12) * 50 * .4 = .83

Recognized Revenue 120.08 (.08 is a rounding error, or not). To find the fraction we take Months in Year – Month + 1/2 a month. This is because in say January we sell a contract on Janaury 1st , 2nd. 3rd…31st. Now if we put that perspective onto a year ((1/365) + (n/365) + 1) / 365) you end up with .5 which is a shortcut.

Now if we recognized 120k in YR 1 we must defer 480k for YR 2 and beyond (answer B)

To answer your second question, assuming no new contracts / data we would take 600k *.6 * .5 or 180k (first 6 mos of sale) and and additional 120k for 600*.5*.4 (last 6 mos of sale_. So in YR 2, we would recognize 300k worth of contracts, and then in YR 3, we would recognize the remainder 180k (600 * .6 * .5) (last 6 mos of sale)

Again this has to do with the fact that sales were even. In YR 2, half the sales would be entering the 60% mark, while the other half would still be 40%. In YR 3, only the latter half of sales would still be being earned at 60%.

I hope this clarifies.

ALL 4 parts passed summer 13
Ethics October 13
Experience (waiting)

Becker Only

[Author]

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