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see Kaplan study text, Chapter Substance over form, example 6- revenue recognition,
How can warranty $10 be minus from washing Machine revenue and at the same time be a revenue???
How can interest $25 be minus from washing Machine revenue and at the same time be a revenue???
Please help ??? 🙁
Read the solution carefully.
The price of $500 each includes a credit free of $25 (interest) and $10 for 3 years of parts.
So the real price of the machine is $500 – $25 – ($10 X 3)
then recognise the $25 as interest income.
and Warranty revenue $30.Quick question here – warranty is paid upfront for 3 years at a total of £30. Therefore £10 hits the income statement in the first year and the other £20….? Is this best classed under creditors or deferred income in the first year. (on the basis that the income is not yet earned IAS 18)
Given that in every instance the £20 for the upfront payment is classed as a liability is this not contradictory to the definition of a liability provided by the framework??? i.e. the £20 is not going to be transferred to a 3rd party. It is merely stored as a liability until the income is recognised…
food for thought or am i understanding this incorrectly?
I think ( ! ) the answer would be to treat it as deferred income and recognise the 2 x $10 over the remaining 2 years.
I agree that it does not satisfy the definition of a liability in that the settlement of a liability would probably involve the outflow of economic resource – which doesn’t seem to apply here
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