ExpertMedium1 markMultiple Choice
CPA · Question 36 · Area III: Select Transactions
On January 1, Year 1, Retailer sells a product for $100. The product includes a warranty that covers defects for 1 year (Assurance Type). Retailer also sells an extended warranty for years 2-3 for $20 (Service Type). The customer buys both. <br/><br/>How much revenue is recognized on January 1, Year 1?
On January 1, Year 1, Retailer sells a product for $100. The product includes a warranty that covers defects for 1 year (Assurance Type). Retailer also sells an extended warranty for years 2-3 for $20 (Service Type). The customer buys both. <br/><br/>How much revenue is recognized on January 1, Year 1?
Answer options:
A.
$120
B.
$100
C.
$0
D.
$110
How to approach this question
Assurance Warranty is not a separate performance obligation (accrue expense). Service Warranty IS a separate PO (defer revenue and recognize over coverage period). Product is delivered now.
Full Answer
B.$100✓ Correct
B
1. **Product Sale:** $100. Recognized at point of sale (Jan 1). Assurance warranty is a liability accrual, not deferred revenue.<br/>2. **Extended Warranty:** $20. Separate Performance Obligation. Recognized over the coverage period (Years 2-3).<br/>Total Revenue Jan 1 = $100.
Common mistakes
Recognizing service warranty immediately; treating assurance warranty as a separate PO.
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