Question

1. Too Nice Company (TNC) includes with the sale of its jumping bean machine, a 5-year warranty that covers all repairs and maintenance. The selling price for the jumping bean machine and the related warranty is $1,000. A competitor sells a similar machine without any warranty for $850. TNC does not sell the warranty separately nor is it aware of any company that does. TNC estimates it will cost $120 to perform warranty work on each jumping bean machine over the 5-year warranty period. TNC’s average markup on sales is 40%. In 2019, TNC sells 1,200 jumping bean machines, and incurs $22,000 total warranty cost on the 1,200 machines.

1. How much revenue will be recognized from the above transaction in 2019?

Answer 1

In the given question, there are two aspects for which revenue is to be recognised.

1st one - Revenue for Jumping bean machine

The selling price of a machine is $1000 with warranty of 5 years. If we split up the revenue components of a machine and the warranty, then $850 is for the machine (because similar competitor is selling the same machine at $850 without warranty) and the balance $150 is for the warranty charges of 5 years.

In the whole year, the company has sold 1200 machines.

Thus, revenue to be recognised for the machines for the year is 1200 x $850 = $ 10,20,000.

2nd one - Revenue for the Warranty charges of 5 years

In the Sales price of the machine, the revenue of $150 belongs to the Warranty obligation for 5 years. Thus, this revenue of warranty per machine is required to be distributed proportionately over a period of 5 years. So, revenue of warranty per machine for a year is $150/5years i.e. $30 per machine per year.

Thus, revenue to be recognised for the warranty charges for the year is 1200 x $30 = $ 36,000.

Total Revenue for the year = $ 10,20,000 + $ 36,000 = $ 10,56,000.

Deferred Revenue for the warranty = 1200 x $120 = $ 1,44,000.

Extra - This is not asked in Question - Calculation of Net Profit = ($10,20,000 x 40%) + $36000 - $22000 =$422,000.

For simpler understanding, an image is attached.

I Sole price rice $ 1 000 Machine's Price W orronty Price $850 ( Simila Competitor price $ 150 le. Balance Clero - 850 Revenue to be recognised immediately It is for 5 years. Revenue for the machines z 1200 x $850 - 1910,20,000 for 1 yte $30 Revenue for the Current year is to be recognised and Balance is to be de . Revenue to be recognised = 1200 x $ 30 z $ 36 000 Revenue to be deferred! z 1200 $120 = $144,000 Journal entry (in $) Bank Mo Dr 1200,000 To Revenue from machines 10. 20.000 To Revenue form Warranty 36.000 To Deferred Revenue for 144.000 Warranty [Being revenus recognised