Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
A) service revenue.
B) deferred service revenue.
C) a reduction in installment accounts receivable.
D) a direct addition to retained earnings.

Question

Quizplus · Accepted Answer

Collections received for service contracts are considered deferred service revenue because the service has not yet been provided. The revenue will be recognized over the three-year period that the service contract is in effect. Option A is incorrect because service revenue would be recognized when the service is actually provided. Option C is incorrect because installment accounts receivable represent payments received for the sale of the appliance, not for the service contract. Option D is incorrect because collections for service contracts should be recorded as a liability, not an addition to retained earnings.