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Hi , mike I have posted a similar question on the acca f7 forum accidentally so I thought I post it here now.
This is a note for a trial balance question
A)Included in the sales figure is an amount of £2,000 for ‘Warranty’ income. This allows the customers “free” servicing and repairs for one year from the date of purchase. Assume that the sale of goods giving rise to this income was sold evenly throughout the year.
I don’t know how much of this would be the sale and how much is deferred income. In previous example I have you , it assumed that half the year is the sale and the rest is warranty is that the same for this question as well. And if so why?
Sounds very similar to me! So presumably there is just $1,000 included in revenue and the other $1,000 deferred until next year. Am I correct?
Yes that’s correct but I still fail to understand why in both examples we have half a year of sale and the rest is deferred income.
This was the question posted on the forum
(a)Sales include goods which have been sold with a price tag that includes “free” servicing for the next 3 years. The amount included in Sales for this warranty income is £600k. Assume that the sales of goods giving rise to this income arose evenly throughout the year.If sales happen evenly through all three years, then the first year’s sales happen on average on 30 June. So, over a three year period, only 6 months’ sales have taken place in that first year.
Imagine ….. you buy from the company on 1 January and your mother buys the same item on 31 December. So, in that year, the company has sold 2 items (or 20, 200, 20,000, 2 million) But the warranty on yours lasts from 1 January for 3 years and the warranty on your mother’s purchase lasts for 3 years from 31 December.
You have used up a full year’s worth of warranty but your mother has used none (ok, 1 day)
So, on average, the sales in that first year have used only half a year’s warranty
Next year you will use up the entire second of your three years but your Mum will use only the first of her three years. Nevertheless, you will both use up a full year.
Next year you will use the last of your three year warranty, your Mum will use her second year.
And the year after that you have no warranty left but your Mum will use up her third and final year So, in this fourth year, you have no warranty and your Mum has a full year. On average, a half year
You Your Mum
Year one average………..half a year 1 0
Year two average………..a full year 1 1
Year three average……..a full year 1 1
Year four average………a half year 0 1So, at the end of the first year, on average, only half a year warranty has been used up and therefore two and a half years are deferred
Better?
Thanks mike, you have explained it perfectly you have my respect for the effort you have made in answering my question. Much appreciated mate.
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