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Chapter 14: Q4IFRS (page 772)

Pleasant Co. manufactures specialty bike accessories. The company is known for product quality, and it has offered one of the best warranties in the industry on its higher-priced products鈥攁 lifetime guarantee, performing all the warranty work in its own shops. The warranty on these products is included in the sales price. Due to the recent introduction and growth in sales of some products targeted to the low-price market, Pleasant is considering partnering with another company to do the warranty work on this line of products, if customers purchase a service contract at the time of original product purchase. Pleasant has called you to advise the company on the accounting for this new warranty arrangement.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Identify the accounting literature that addresses the accounting for the type of separately priced warranty that Pleasant is considering.
  2. When are warranty contracts considered separately priced?
  3. What are incremental direct acquisition costs and how should they be treated?

Short Answer

Expert verified
  1. An item maintenance contract or an enhanced guarantee offered separately is handled in terms of income and costs.
  2. The contracts are considered separately priced when buyers can purchase an additional extended warranty.
  3. The contract is immediately allocated the incremental direct cost, which is the additional direct cost.

Step by step solution

01

Meaning of FASB

FASB is autonomous for the non-profit, private association that develops financial accounting and reporting standards for for-profit and public businesses that follow GAAP.

02

(a) Identifying account literature

In understanding FASB ASC 605-20-25, revenue and expenses related to an item upkeep contract or an amplified guarantee sold separately are addressed.

03

(b) Explaining when warranty contracts are considered separately priced

An Extended Warranty is a contract that promises to extend the original manufacturer's warranty's coverage duration or to give warranty protection beyond the original warranty's sphere of application if any.

Maintenance of Products Contracts are agreements to carry out specific agreed-upon services to maintain a product for a predetermined time. The conditions of the contract may express in various ways, such as an agreement to carry out a certain service regularly or an agreement to carry out a specific service as needed during the duration of the contract.

Separately Priced Contracts are agreements that provide the buyer the choice to add an extended warranty or a maintenance contract to their purchase for a clearly stated sum in addition to the product's purchase price.

04

(c) Explaining the incremental direct acquisition costs and how they should be treated

Incremental direct acquisition costs are expenses that are delayed and charged in proportion to revenue realized that are directly associated with the acquisition of a contract but would not have been incurred absent that contract. All other expenditures, including those for services rendered by the contract, general and administrative costs, marketing costs, and expenses related to contract negotiations that do not result in a consummated agreement, must be charged to expenses as they are incurred.

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Most popular questions from this chapter

Question: Under what circumstances would a transaction be recorded as a troubled-debt restructuring by only one of the two parties to the transaction?

(Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2016, paying \(50,000 down and agreeing to pay the balance in four equal installments of \)40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price.

Instructions Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.

(Round answers to the nearest cent.)

(a) December 31, 2016. (d) December 31, 2019.

(b) December 31, 2017. (e) December 31, 2020.

(c) December 31, 2018.

(Comprehensive Problem: Issuance, Classification, Reporting) The following are four independent situations.

(a) On March 1, 2018, Wilke Co. issued at 103 plus accrued interest \(4,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Wilke Co. incurred \)27,000 of bond issuance costs. Compute the net amount of cash received by Wilke Co. as a result of the issuance of these bonds.

(b) On January 1, 2017, Langley Co. issued 9% bonds with a face value of \(700,000 for \)656,992 to yield 10%. The bonds are dated January 1, 2017, and pay interest annually. What amount is reported for interest expense in 2017 related to these bonds, assuming that Langley used the effective-interest method for amortizing bond premium and discount?

(c) Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.

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\(300,000

\)100,000

2019

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250,000

2020

100,000

100,000

2021

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2022

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2023

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100,000

Indicate how this information should be reported in the financial statements at December 31, 2017.

(d) In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage bonds payable \(10,000,000; collateral trust bonds \)5,000,000; bonds maturing in installments, secured by plant equipment $4,000,000. Determine the total amount, if any, of debenture bonds outstanding

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

(Issuance and Redemption of Bonds; Income Statement Presentation) Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of \(3,000,000 on January 2, 2003, at a discount of \)150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

Instructions

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(b) Indicate the income statement treatment of the gain or loss from redemption and the note disclosure required.
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