Question

Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $1,900. When sold separately, a maintenance contract is $600 and a comparable but non-specialized bike is $1,400. What amount of revenue will Neakanie recognize at the date of sale for each bike

Answer 1

$1,330 per bike

Step-by-step explanation:

the amount of revenue that Neakanie must recognize = total sales price x [price of the bike / (price of the bike + maintenance service)] = $1,900 x [$1,400 / ($1,400 + $600)] = $1,900 x 0.7 = $1,330 per bike

the journal entry should be:

Dr Cash 1,900

Cr Sales revenue - bike 1,330

Cr Prepaid maintenance services - bike 570

the prepaid maintenance service should be accrued during the year, and revenue must be recognize after each month passes.