CFA Practice Question

CFA Practice Question

Proctor Ltd. sells major household appliance service contracts for cash. The service contracts are for a 1-year, 2-year, or 3-year period. Cash receipts from contracts are recorded as unearned contract revenues. This account had a balance of $720,000 at December 31, 2006. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:

During 2007: $150,000
During 2008: $225,000
During 2009: $100,000

What amount should be reported as unearned service contract revenues in Proctor's December 31, 2006 balance sheet?
A. $475,000
B. $245,000
C. $540,000
Explanation: Unearned service contract revenues relate to outstanding contracts for which the agreed service has not yet been provided. Thus, the amount to be reported as unearned service contract revenues covers all contracts that are outstanding at December 31, 2006 which totals $475,000 (150,000 + 225,000 + 100,000)

User Contributed Comments 8

User Comment
dimos What about the initial balance of 720.000? Anybody?
anricus I think the 720 is the total in the account before required adjustment. So the closing balance should be 475 meaning that the difference should be taken to the P&L

Therefore Revenue is the difference between 720 and 475

Revenue 245
(Accounting entry
Dr Unearned revenues (bal sheet) 245
Cr Revenue (P&L) 245

The 180 expense will be taken to the P&L also.

Dr Service Contract expense account 180
Cr Cash 180

245 should be taken to the P&L
armanaziz Shouldn't revenue be recognized on the date when contracts are complited or should the accountant wait till the closing to pass the adjustment?
thekapila for service contract revenue should be recognised after services r performed. So dec 2006, we are left with 3 unperformed services.
2007,08,09
cong Only the three figures listed are relevant
yongsl88 tricky with the initial end bal of 720k
mrpman still don't get why we don't use the 720 initial balance
GBolt93 720 is the amount before end of year adjustments.
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