Tekniks sells electronic products, such as televisions and stereo components.Each product is sold with a two-year warranty.During this period, Tekniks will provide parts and labour for repairs at no cost to the customer.Due to the highly competitive nature of the business, the warranty program has resulted in an increase of 20% in sales.Similar warranty programs at competitors sell for $200 to $500. How should Tekniks recognize revenues from their sales?

Question

Quizplus · Accepted Answer

Since Tekniks is providing parts and labor for repairs for free during the two-year warranty period, the company cannot recognize the full amount of revenue from the sale of the product at the time of purchase. The revenue from the sale of the product should be recognized at the time when the customer takes possession of it, and the revenue from the warranty program should be recognized evenly over the two-year period as a separate performance obligation. This method of revenue recognition, known as the "allocation" method or "sell-through" method, is appropriate in this case as it represents the pattern of transfer of goods and services to the customer over time.

Tekniks Sells Electronic Products, Such as Televisions and Stereo Components