Question

Cobb company sells appliance service contracts to repair appliances for a two-year period. cobb's past experience is that, of the total amount spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% is incurred evenly during the second contract year. receipts from service contract sales for the two years ended december 31, 2020, are $250,000 in 2019 and $300,000 in 2020. receipts from contracts are credited to deferred warranty revenue. assume that all contract sales are made evenly during the year. what amount should cobb report as deferred warranty revenue at december 31, 2020? select one:

a. $235,000
b. $315,000
c. $240,000
d. $180,000

Answer 1

Option B. $315,000 is the correct answer for the deferred warranty revenue at December 31, 2020. This reflects 60% of 2019's receipts and 2020's receipts yet to be recognized after accounting for the services deemed to be incurred during 2020.

Step-by-step explanation:

The correct answer is option B. $315,000. We can determine this by analyzing the deferred warranty revenue at the end of 2020 based on the information provided about Cobb Company's revenue recognition for their appliance service contracts. For the contracts sold in 2019, $250,000, half of their two-year span would be in 2020, so we would expect 40% of this amount, which is $100,000, to be recognized in 2020 and the remaining 60%, which is $150,000, to be deferred to the end of the year.

Next, looking at the 2020 contracts of $300,000, since the contracts are evenly distributed, we divide this number by 2 to get the six months' worth expected to be spent that year (since 40% is spent in the first year), which sums up to $60,000. The rest, $240,000, would be deferred. Adding the deferred amounts from both years, we get $150,000 + $240,000 = $390,000. However, we must exclude the 40% of the 2020 contracts that would be recognized in the first year, which equals to $120,000. Subtracting this from the total gives us $390,000 - $120,000 = $270,000 to be recognized in 2020. Therefore, the amount still deferred at the end of 2020 is $315,000.