lecture10 - on the washing machine + a partial discount on...

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ACCT 3220/Sep 15, 2010 1 Revenue Recognition for Multiple Deliverables (bundled products) Generally need to identify and separate underlying product items to appropriately recognize revenue when delivered and accepted One issue is that product price ≠ fair value, so we often need to identify fair value to appropriately recognize revenue Example: Best Buy sells floor model washing machine for $500 and adds 2 year extended warranty for $10 to “seal the deal” Bundled price = $510. But this is not fair value since 2 year warranties typically sell for $99. Hence, the real fair value of this deal is $599. Best Buy would like to recognize $500 of revenue now for delivery of the washing machine and defer only $10 of unearned warranty revenue (Best Buy claims it gave an $89 discount on the warranty only) Instead, standards require Best Buy to treat the sale as if it gave a partial discount
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Unformatted text preview: on the washing machine + a partial discount on the warranty Revenue Recognition for Multiple Deliverables (bundled products) Normally, the washing machine price is 500/599 = 83.5% of the total bundle fair value Since Best Buy sold this bundle for $510, the washing machine portion of the sale is: 83.5% x $510 = $426 Instead of recognizing $500 of revenue now (for the washer), Best Buy can only recognize $426 of revenue now The remaining $84 of revenue gets booked as a liability (deferred revenue) and is earned as time elapses over the next 2 years Normally, the warranty price is 99/599 = 16.5% of the total bundle fair value Therefore, the warranty portion of the sale is: 16.5% x $510 = $84 What type of behavior does this treatment prevent managers from doing? ACCT 3220/Sep 15, 2010 2...
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This note was uploaded on 10/12/2010 for the course ACCT 3220 at Colorado.

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lecture10 - on the washing machine + a partial discount on...

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