Deferred Revenue

Question 1

Deferred vs Accrued Revenue

Answer 1

Cash before Service or Service before Cash

Question 2

Entries impacting Unearned Revenue Liability

Answer 2

Use T Accounts

Cash Received (Cr)
Cash Refunded (Dr)
Revenue Recognized (Dr as Cr is to Revenue when earned)

Question 3

Gift Card Entries

Answer 3

1. Card Purchased: Dr Cash and Cr Gift Card Liability
2. Product Purchased: Dr GCL, Cr Sales AND Dr COGS, Cr Inventory (usually off GM %)
3. Gift Card Forfeitures (Dr GCL, Cr Sales)

Question 4

Extended Warranty

Answer 4

1. Separate from regular Warranty and is Unearned
2. IF Total Cost of Future Claims can be estimated, Sales recognized in proportion to claims incurred as follows (actual Claims / Estimated Claims)*Total Warranty Sales.
3. Direct Costs: i.e. (Commissions) are DEFERRED and recognized in proportion as above (same %) but x by the Warranty Amount Deferred (Sales Commissions etc)

Question 5

Subcontract of Production

Answer 5

no liability for the subcontracted production because no resources have been exchanged.

Question 6

Gift Certificates

Answer 6

If the gift certificates lapse, this will also decrease unearned revenue and recognize other income or a payable if the governing authorizes require these amounts to be remitted as unclaimed property

Question 7

Deposits

Answer 7

The damage deposit on all apartments is $500. Although it is likely that most tenants will be charged for some damages and cleaning, these reductions in the amount to be reimbursed cannot be anticipated. The damage to the apartments typically is not known until the end of the lease term

Question 8

Advances with cancellations

Answer 8

The customer advances account is a liability. It represents amounts received from customers for orders not yet filled by the firm. Advances on cancelled orders may or may not be returned, but either way cancellation reduces the liability

Question 9

Non-Current Liability Deposit

Answer 9

The $25,000 rent deposit is a noncurrent liability because it will be applied toward the rental of a tenant more than one year after the 2004 balance sheet.

Question 10

Lapse or Expiration of Gift Card

Answer 10

The redemption of the certificates would decrease deferred revenue and increase revenue because the earnings process is completed once the store delivers the merchandise. If the gift certificates lapse, this will also decrease unearned revenue and recognize other income or a payable if the governing authorizes require these amounts to be remitted as unclaimed property.

Question 11

Subcontract Production

Answer 11

The only liability (deferred revenue) to be recorded is the advance for 60% of the main contract price.
Dallas received this cash and has a liability for that amount until it performs on the contract. Dallas has no liability for the subcontracted production because no resources have been exchanged.