Question

Haymitch Co. sold equipment on January 1 with a two-year service contract for a single payment...

Haymitch Co. sold equipment on January 1 with a two-year service contract for a single payment of $200,000. The fair market value of the equipment upon sale was $170,000.

a. What are the ending balances of any revenue-related balance sheet accounts related to this sale on December 31? (Ignore Cash, COGS, and Inventory.)

b. What are the revenue related income statement amounts related to this sale on December 31? (Ignore Cash, COGS, and Inventory.)

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Answer #1

Fair market value of the equipment sold = $170,000

Total sale value of equipment and a two-year service contract = $200,000

Service revenue for two years = Total sale value of equipment and a two-year service contract - Fair market value of the equipment sold

= 200,000 - 170,000

= $30,000

a)

Service revenue earned for year 1 = Service revenue for two years/2

= 30,000/2

= $15,000

Unearned service revenue at December 31, year 1 = Service revenue for two years - Service revenue earned for year 1

= 30,000 - 15,000

= $15,000

At December 31, year 1, unearned service revenue of $15,000 will appear on the liabilities section of the balance sheet.

b)

At December 31, year 1, sales revenue of $170,000 and service revenue of $15,000 would appear on the income statement.

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