Fancy Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Question

Fancy Cars sold a car for $35,000. In addition, the company will provide 4 oil changes per year for 5 years and an extended warranty for 5 years. The normal selling prices are as follows:
  a. Determine how revenue should be allocated to the various components in this transaction.
b. Apply the appropriate revenue recognition criteria to determine when revenue should be recognized to the components in this transaction.

Quizplus · Accepted Answer

The Answer is a. The residual value method is appropriate since the fair value for all components is not determinable.

a. The residual value method is appropriate since the fair value for all components is not determinable. b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (1,000/ (4/yr*5yrs)). The revenue for the warranty would be recognized over the 5 years.

b. Revenue for the car should be recognized upon delivery. Revenue for the oil changes will recorded as each of the 20 oil changes is performed (1,000/ (4/yr*5yrs)). The revenue for the warranty would be recognized over the 5 years.

Fancy Cars Sold a Car for $35,000