Question

Ryan Co. 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 credited to unearned service contract revenues. This account had a balance of $720,000 at December 31, Year 1, before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $180,000 at December 31, Year 1. Outstanding service contracts at December 31, Year 1, expire as follows:
During Year 2
-
$150,000
During Year 3
-
225,000
During Year 4
-
100,000
What amount should be reported as unearned service contract revenues in Ryan's December 31, Year 1, balance sheet?

Answer 1

Answer:

$475,000

Explanation:

The amount should be reported as unearned service contract revenues in Ryan's December 31, Year 1, and balance sheet will be the amount that has not expired in year 1 or outstanding service contracts that will expire in year 2 to year 4. Therefore,

Year 2 + Year 3 + Year 4 = $150,000 + 225,000 + 100,000 = $475,000 should be reported as unearned service contract revenues.