Woodwards Store sells major household appliance service contracts for cash.The service contracts are for a one-year, two-year, or three-year period.Cash receipts from contracts are credited to unearned service contract revenues.This account had a balance of $600,000 at December 31, 2016 before year-end adjustment.Service contract costs are charged as incurred to the service contract expense account, which had a balance of $150,000 at December 31, 2016.Outstanding service contracts at December 31, 2016 expire as follows: What amount should be reported as unearned service contract revenues in Woodwards' December 31, 2016 statement of financial position?

Question

Woodwards Store sells major household appliance service contracts for cash.The service contracts are for a one-year, two-year, or three-year period.Cash receipts from contracts are credited to unearned service contract revenues.This account had a balance of $600,000 at December 31, 2016 before year-end adjustment.Service contract costs are charged as incurred to the service contract expense account, which had a balance of $150,000 at December 31, 2016.Outstanding service contracts at December 31, 2016 expire as follows:  What amount should be reported as unearned service contract revenues in Woodwards' December 31, 2016 statement of financial position?

Quizplus · Accepted Answer

The unearned service contract revenues account had a balance of $600,000 before year-end adjustment. However, some of the service contracts had been performed by the end of the year, so they must be recognized as revenue based on the portion of the contract that has been fulfilled. The cost incurred for these contracts has already been charged to expense.

Therefore, the balance of unearned service contract revenues after adjustment should be $600,000 - $150,000 = $450,000.

Woodwards Store Sells Major Household Appliance Service Contracts for Cash