Question

Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenue. This account had a balance of $3,800,000 at December 31, 2014 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $900,000 at December 31, 2014. Service contracts still outstanding at December 31, 2014 expire as follows:

During 2015 $960,000
During 2016 1,140,000
During 2017 700,000
What amount should be reported as Unearned Service Revenue in Eaton's December 31, 2014 balance sheet?
a. $2,900,000.
b. $2,800,000. (Correct answer: $960,000 + $1,140,000 + $700,000 = $2,800,000.)
c. $1,900,000.
d. $1,000,000.

Answer 1

b. $2,800,000.

Step-by-step explanation:

Since the contracts are accepted on cash basis, receipts are recorded in Unearned Service Revenue. In this case, the contracts outstanding as on 31st December 2014 is recorded in unearned service revenue as those cash is received in advance and will be credited to unearned service revenue

Unearned service revenue in Eaton's December 31, 2014 Balance sheet = $960,000 + $1,140,000 + $700,000 = $2,800,000