[NinaSun]

Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne’s past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue?

a. $480,000

b. $360,000

c. $540,000

d. $300,000

The answer is “a”. They calculate revenue in current year as $600*1000*40%*1/2. Why should multiply by 1/2? Can any one help? Thanks

AUD-74,75 11/2014
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