Question

Suppose base price of the medical service without warranty is $1,000 and the ABC company incurrs costs of $8,00 for the surgery. Assume that the ABC company offers a one year plan for $300. Historically, 1 in 10 patients require follow-up treatment, which costs $800 for each patient needing treatment. How should ABC recognize revenue (using revenue recognition / sales-warrenty approach).

1) Required journal entries for the first and second year. Assume the sale of one surgery with the purchase of a one-year plan and that costs follow historical averages.
2) How is ABC accounting for separately priced extended warranties? How should they account for separately priced extended warranties?

Answer 1

Part-1
Date	Books of ABC Company		$	$
First Year	Bank A/C	Dr.	1,000.00
	To Profit & Loss (Revenue)	Cr.		1,000.00
	(being revenue booked for)
	Profit & Loss (Variable Cost)	Dr.	800.00
	To Bank	Cr.		800.00
	(cost of medical service)
	Bank A/C	Dr.	300.00
	To Income received in advance (Balance Sheet)	Cr.		300.00
	(being amount of )
Second Year	To Income received in advance (Balance Sheet)	Dr.	300.00
	To Profit & Loss (Revenue)	Cr.		300.00
	(being revenue booked for)
	Profit & Loss (Provisional Cost)	Dr.	80.00
	To Provision for Warranty Cost	Cr.		80.00
	(cost of medical service)
Part-2	ABC is accounting separately for price extended warranty for as main service and warranty are distinct services.