Show Solutions: BUGS Appliance Company’s accountant has been reviewing the firm’s past television sales. For the past years, BUGS has been offering a special service warranty on all televisions sold. With the purchase of a television, the customer has the right to purchase a 3-year service contract for an extra P600. Information concerning past television and warranty contract sales is given below: 2007 2006 Television sales in units 550 460 Sales price per unit P5,000 P4,000 Number of service contracts sold 350 300 Expenses relating to television warranties 38,520 13,400 BUGS’ accountant has estimated from past records that the pattern of repairs has been 40% in the year of sale, 36% first year after sale and 24% on 2nd year of sale. Sales of the contracts are made evenly during the year. 1. What is the adjusted balance of the unearned service contract as of December 31, 2007? a. 111,600 b. 168,600 c. 211,200 d. 243,600 2. How much profit on service contract would be recognized in year 2007? a. 42,000 b. 68,400 c. 71,880 d. 110,400
Show Solutions:
BUGS Appliance Company’s accountant has been reviewing the firm’s past television sales. For the
past years, BUGS has been offering a special service warranty on all televisions sold. With the purchase
of a television, the customer has the right to purchase a 3-year service contract for an extra P600.
Information concerning past television and warranty contract sales is given below:
2007 2006
Television sales in units 550 460
Sales price per unit P5,000 P4,000
Number of service contracts sold 350 300
Expenses relating to television warranties 38,520 13,400
BUGS’ accountant has estimated from past records that the pattern of repairs has been 40% in the year
of sale, 36% first year after sale and 24% on 2nd year of sale. Sales of the contracts are made evenly
during the year.
1. What is the adjusted balance of the unearned service contract as of December 31, 2007?
a. 111,600
b. 168,600
c. 211,200
d. 243,600
2. How much profit on service contract would be recognized in year 2007?
a. 42,000
b. 68,400
c. 71,880
d. 110,400
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