[NinaSun]

Delect Co. provides repair services for the AZ195 TV set. Customers prepay the fee on the standard one-year service contract. The Year 1 and Year 2 contracts were identical, and the number of contracts outstanding was substantially the same at the end of each year. However, Delect’s December 31, Year 2, deferred revenues’ balance on unperformed service contract was significantly less than the balance at December 31, Year 1. Which of the following situations might account for this reduction in the deferred revenue balance?

a. Most Year 2 contracts were signed later in the calendar year than were the Year 1 contracts.

b. The Year 2 contract contribution margin was greater than the Year 1 contract contribution margin.

c. The Year 2 contribution margin was less than the Year 1 contract contribution margin.

d. Most Year 2 contract were signed earlier in the calendar year than were the Year 1 contracts.

The answer is “d”. I have more language confusion in this question. I understand “contract outstanding” is unperformed contract. So, in my mind unearned revenue for the two year ends should be the same. The explanation says year 2 unperformed contract is less, thus deferred revenue is less. Can any one explain that? Thanks

AUD-74,75 11/2014
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[Kisscat]

I have the same question as NinaSun did. Can anyone explain this? Thanks!

[Kisscat]

Maybe the term “contract outstanding” means total number of contracts sold during the year, instead of unperformed contract. Not sure about it.

[Anonymous]

Deferred Revenue means cash was received but revenues are not recognized because the services have not been performed. Reduction in deferred revenue means the revenue has been earned. My thoughts on this in regards to the answer given is that Year 2 contracts were signed earlier in the year so there would be a larger balance of deferred revenue. As the year goes on the company performed the services and “earned the revenue”, reducing deferred revenue.

If year 1 contracts were signed late in the year, say December, then the large balance would be in deferred revenue, and less performances would be satisfied due to timing so the balance would sit in deferred revenue at year end.

[Anonymous]

To add to that, I would think of contracts outstanding as contracts that have not been completed. Hence, that does not impact how much revenue has been recognized on the contract.

[Dark Knight]

Delect's December 31, Year 2, deferred revenues' balance on unperformed service contract was significantly less than the balance at December 31, Year 1 means that more revenue was recognized in Year 2 than Year 1

Deferred Revenue XXX
To Revenue XXX

That also means more contracts were performed in Year 2 than in Year 1. Hence the answer – d. Most Year 2 contract were signed earlier in the calendar year than were the Year 1 contracts.

P.S.: Not sure…just applying the logic :/

[Anonymous]

They are service contracts, which means revenue is recognized over time evenly (the length of the contract). IF the number of contracts of each type is the same, and the number outstanding is the same, and more revenue was recognized in the 2nd year, it means that the 1 year contracts were recognized more in the 2nd year than the first year, since their unearned portion is what is keeping the Deferred Revenue balance up a end of year 1. This means that the 1 year contracts must have been signed later in year 1.

[Author]

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