Deferred Revenue

Question 1

What is a deferred revenue?

Answer 1

A liability recognized when cash is received before the service is provided or before the goods are shipped to customers.

Question 2

How are deferred revenues accounted for?

Answer 2

as a liability

Question 3

Short cut to solve for revenue earned when given beginning and ending balances of Unearned Rev and AR

Answer 3

An alternative approach is to simply assume that one-half the total cash received relates to each of the two accounts (accounts receivable and unearned revenue). Again, an equation or T account may be used for the analysis; this time the account analysis can proceed separately for each account. Then add them together.

Question 4

When dealing with gift cards, when is the gift card liability lowered?

Answer 4

When gift cards are redeemed or when they expire.

Question 5

Are gift card and container deposit liabilities definite liabilities

Answer 5

yes

Question 6

How do you account for extended warranties?

Answer 6

The unearned revenue is recognized as revenue over the life of the contract;
Warranty expense (cost to service claims) is recognized as incurred;
If the total cost of servicing claims over the contract life is estimable, then the revenue is recognized in proportion to costs incurred. Otherwise the straight-line method is used;
Costs directly related to individual contracts (e.g., commissions) are capitalized and amortized over the life of the contract in the same proportion as revenue is recognized;
Advertising and other indirect costs are expensed as incurred.