Chips-n-Bits Company sells service contracts for personal computers.The service contracts are for a one-year,two-year,or three-year period.All sales are for cash and all receipts are credited to Unearned Service Contract Revenues.This account had a balance of $144,000 at December 31,2012,before year-end adjustment.Service contract costs are charged as incurred to the Service Contract Expense account,which had a balance of $36,000 at December 31,2012.Service contracts still outstanding at December 31,2012,expire as follows: What amount should be reported as unearned service contract revenues in Chips-n-Bits December 31,2012,balance sheet?
A) $49,000
B) $59,000
C) $95,000
D) $108,000

Question

Chips-n-Bits Company sells service contracts for personal computers.The service contracts are for a one-year,two-year,or three-year period.All sales are for cash and all receipts are credited to Unearned Service Contract Revenues.This account had a balance of $144,000 at December 31,2012,before year-end adjustment.Service contract costs are charged as incurred to the Service Contract Expense account,which had a balance of $36,000 at December 31,2012.Service contracts still outstanding at December 31,2012,expire as follows:  What amount should be reported as unearned service contract revenues in Chips-n-Bits December 31,2012,balance sheet?
A) $49,000 
B) $59,000 
C) $95,000 
D) $108,000

Quizplus · Accepted Answer

The unearned service contract revenue is the amount that has been received for service contracts that have not yet been performed. The balance of the Unearned Service Contract Revenues account before adjustment is given as $144,000, which represents the cash received for all service contracts sold. However, some of these contracts have been performed, and therefore the revenue should now be recognized.

To determine the amount of revenue that should be recognized, we need to subtract the cost of the contracts that have been performed from the cash received. The Service Contract Expense account represents the cost of the contracts that have been performed, and its balance is given as $36,000. This means that $144,000 - $36,000 = $108,000 of revenue has not yet been recognized.

We also need to take into account the contracts that are still outstanding at the end of the year. These contracts have not yet been performed, and therefore the revenue cannot yet be recognized. The total value of outstanding contracts is given in the table as $13,000 (for one-year contracts), $24,000 (for two-year contracts), and $13,000 (for three-year contracts), for a total of $50,000.

Therefore, the unearned service contract revenues that should be reported in Chips-n-Bits December 31, 2012 balance sheet is $108,000 + $50,000 = $95,000. Thus, the correct answer is C.

Chips-N-Bits Company Sells Service Contracts for Personal Computers