Niwot Co. sells products and service plans both separately and bundled together. Willy Loman, a Niwot Co. salesman, sold a Widgetron in 2014 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 2014. Is this correct? Why or why not?

Question

Jaydan Stout

Business

29 November, 10:09

Niwot Co. sells products and service plans both separately and bundled together. Willy Loman, a Niwot Co. salesman, sold a Widgetron in 2014 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 2014. Is this correct? Why or why not?

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Answers (1)

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Darion Dalton · Answer 1

Its incorrect treatment.

Explanation:

The reason is that the company has to accrue revenue on the grounds that the revenue would be earned on the consideration paid basis. In this scenario the company has delivered the product and services combined. The revenue from the product sale of $850 must be accrued while the $150 would be treated as deferred revenue (Unearned revenue). This deferred revenue would be divided by the number of years and allocated to the year as a accrued income.

The above treatment is inaccordance with accrual and matching concept.