Question

Crane, Inc. is a retailer of home appliances and offers a service contract on each appliance sold. Crane sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts should be recorded as an increase in a ________.

1) deferred revenue account
2) sales contracts receivable valuation account
3) stockholders' valuation account
4) service revenue account

Answer 1

Collections for service contracts paid in full at the time of sale should be recorded as an increase in a deferred revenue account, which represents an obligation to provide future services. As the service is rendered, the revenue is then recognized.

Step-by-step explanation:

When Crane, Inc. receives collections for service contracts paid in full at the time of sale, these collections should not be recorded directly as revenue since the service has not yet been provided. Instead, the correct accounting treatment is to record the collection as an increase in a deferred revenue account. Deferred revenue is a liability on the balance sheet that represents a company's obligation to provide goods or services to customers in the future. Over time, as the service is performed, the deferred revenue will be recognized as service revenue.