Question

Assume you purchase a wide-screen television from Byrd Appliances for $3500 in order to watch the upcoming Super Bowl. You pay cash for the television. Your purchase includes a service contract that will cover three years.

Why does Byrd recognize the revenue associated with service contract over its life even though the cash is received at the time of sale?

Answer 1

Byrd recognize the revenue associated with service contract over its life even though the cash is received at the time of sale because, today's financial world puts a great emphasis on meeting targets. From the perspective of those who run businesses and their employees, it can mean a difference between a large bonus or being letting go. From a stakeholder's perspective, it could mean a difference between selling or holding a stake in a company. Revenue typically drives a success of most businesses, as it is a means of generating profits and increasing equity. For this reason, attaining revenue recognition is a paramount.

If they sell non warranty product then for revenue recognition price can be determined, collection must be probable, there should be persuasive evidence of an arrangement, and delivery has occured; when these four traditional revenue recognition criteria are met then revenue can be recognized. But it gets complicated when the above criteria do not apply, which is typically due to the type of industry that company operates in. Therefore revenue in these industries typically contract driven and determined on customer by customer basis or contract by contract basis. So that revenue from contract accounting could be subject to revenue recognition criteria of multiple deliverable arrangements. Under this criteria revenue may not be recognized over the life of contract in systematic way rather contract revenue could be broken up into segments and recognized when certain milestones or deliveries are achieved.