And only record revenue when those products and

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and only record revenue when those products and services are provided. Specifically, deposits or advance payments are not recorded as revenue until the company performs the services owed or delivers the goods. Until then, the company's balance sheet shows the advance payment as a liability (called unearned revenue or deferred revenue) because the company is obligated to deliver those products and services. Unearned revenue is particularly common among technology companies that sell goods and services as packages. These sales are called "multi-element contracts," which are sales agreements that bundle goods and services that mayor may not be delivered simultaneously, When delivery is delayed the company must record unearned revenue. Consider for example, the sale of an Apple iPad. The customer not only purchases the tablet hardware but the software integral to the iPad's function, additional software, and future software upgrades. How shoul Apple record revenue for such a multi-element contract? The short answer is that the total sal price is allocated among the elements of the contract and revenue is recognized (as it's earned at different points in time for each element. Allocating the total sales price presents a challenge because elements often do not have stand-alone prices. GAAP allows companies to estimate selling prices for each element if sold separately and then allocate the total selling price ratabl_ among the elements. More specifically, assume that on September 26, 2010 (the first day of Apple's 2011 fiscal year), Apple sells 60 iPads to a customer and charges the total invoice amount of $36,000 to the customer's credit card (a cash transaction). Apple disclosed the following in its 10K: Beginning with initial sales of iPad in April 2010, the Company has also indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to iPad customers. The Company's estimated selling price (ESP) for the embedded software upgrade right included with the sale of each iPad is $10. Amounts allocated to the embedded unspecified software upgrade rights are deferred and recognized on a straight-line basis over 24 months. Apple records $36,000 cash and recognizes revenue on the hardware and software components of the sale. The estimated selling price of $600 for the future software upgrades (60 units -- $10 per unit) is not earned at the point of sale. Instead, Apple records a liability (unearned rev- enue) for this amount. This means that revenue of $35,400 is immediately reported and $6 is reported over the ensuing 24 months. Apple prepares quarterly financial statements and wif recognize $75 ($600 x 3/24) of the unearned revenue each quarter for two years. As revenue is earned, the unearned revenue account on the balance sheet is reduced and revenue is record in the income statement. The following template reflects the initial sales transaction and the subsequent first quarter accounting adjustment.
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Module 5 I Revenue Recognition and Operating Income 5-12 I Balance Sheet Income Statement itl ""'- Cash + Noncash =
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