Question

Pagit, Inc. sells products and service plans both separately and bundled together. Bob Meriwether, a Pagit, Inc. salesman, sold one unit of merchandise in 2018 for $1,000, its normal price, and told the customer he’d "throw in the 3-year service plan for free," which the company normally sells for an additional $150. The product shipped, the customer paid, and $1,000 in revenue was recognized in 2018. Is this correct? Why or why not?

Multiple Choice

This is correct because the understanding between the seller and customer was that the product price was $1,000 and the service plan was free, which is in accordance with the principle of faithful representation.

This is incorrect because the service revenue must be treated as a separate performance obligation, allocated a portion of the $1,000 sales price, and have revenue for it recognized over the three years of the service plan.

This is correct because the product shipped and the customer paid.

This is incorrect because services must be rendered before any revenue can be recognized.

Answer 1

ANSWER:

This is correct because the understanding between the seller and customer was that the product price was $1,000 and the service plan was free, which is in accordance with the principle of faithful representation.

Explanation:

The salesman in this case sold the product at $1000 and he gave the 3 year service plan to the customer for free. So, according to the principle of faithful representation the revenue of $1,000 must be recorded in the books of Pagit, Inc.

The principle of faithful repesentation states that the company must record a transaction as it has occured in its true state.