9-Deferred Revenues

2 methods for extended warranties and treatment?

1. If the total cost of servicing claims over the contract life is estimable, then the revenue is recognized *in proportion to costs incurred*. 2. Otherwise, recognize revenue straight-line over the life of the contract; *remaining balances of unearned revenue are recognized at the end of the contract*

2 criteria for separate revenue recognition for multiple deliverables

1. The delivered item has value to the customer on a stand-alone basis; and 2. If the arrangement includes a general right of return relative to the delivered item, delivery of the undelivered item is considered probable and substantially in the control of the vendor.

Accounting for extended warranties?

1. Unearned revenue is recognized as revenue over the life of the contract; 2. Warranty expense (cost to service claims) is recognized as incurred; 3. Costs directly related to individual contracts (e.g., commissions) are capitalized and amortized over the life of the contract in the same proportion as revenue is recognized; 4. Advertising and other indirect costs are expensed as incurred.

How to determine how much revenue to recognize when a company both accepts prepayments and bills customers after the service?

Create equations for amounts effecting AR and UR using T accounts. Can add equations together to arrive at total revenue or total cash received: AR: revenue earned=End. Bal + cash received −Beg. Bal UR: revenue earned=Beg. Bal + cash received −end. Bal Sum: revenue earned= End+Beg+cash-Beg-End

Journal entries for extended warranties: Sales of 3m, warranties of 150k for 2 years, expected claims of 120k

DR:Cash or Accounts receivable 3,000,000 CR:Sales 2,850,000 CR:Unearned warranty revenue 150,000 DR: Warranty expense 20,000 CR: Cash, inventory, other 20,000 DR: Unearned warranty revenue 25,000 (Proportion of expected services performed (20k/120k) CR: Warranty revenue 25,000

What increases in pretax earnings when a gift card is used by a customer to purchase an item?

Gross margin for the item sold

Exception to allocation for software deliverables?

If deliverables are an integral part of a bundle of products including nonsoftware products, then the previously discussed general guidance for revenue recognition for multiple deliverables is applied (using selling prices rather than fair value), rather than the residual method.

How are deferred revenues expected to be earned more than one year from the balance sheet date classified?

Noncurrent liability.

Allocation of prices for multiple deliverables

Revenue allocated based on stand-alone selling prices; may not be changed

Revenue arrangement for multiple deliverables

Revenue can be recognized as delivered if meet 2 criteria. Otherwise, recognition must wait until the entire service is complete.

What amount of revenue is recognized for a period for an extended warranty when total warranty costs are estimable?

The total amount received for the extended warranty multiplied by the fraction: warranty costs incurred for the period divided by the total estimated warranty costs to be incurred.

What amount of revenue is recognized for a period for an extended warranty when total warranty costs are not estimable?

The total amount received for the extended warranty/term of the warranty

Are gift cards liabilities, definite liabilities, or contingent liabilities?

They are definite liabilities.

Allocation of prices for software deliverables

allocated to the various items based on vendor-specific objective evidence of fair value, regardless of contractually stated selling prices, limited to the price charged when the same item is sold separately