Case #2: Outlet City Retailers

1 . Explain the impact three proposed accounting methods (full revenue acknowledgement, deferral of revenue, and partial earnings recognition) would have on the industry’s financial statements: 1) in the time the sale, and 2) in future periods. Total revenue reputation: I believe this can be a most according to actual material of sales transactions involving equipment and extended warranties. Circuit Metropolis matches up almost correctly with the five criteria in Exhibit 2 in the case study. They received the selling costs, they have a service network in place and warranty bills are predicted with a lot of accuracy. Hardly any customers exceed the allocated cost of the service warranty, thus Outlet City will not employ a allowable. After a warranty is purchased, Circuit City's cost and profit can be expensed using a reasonable level of accuracy. The uncertainty is indeed low, really almost like the warranty specifics were similar to other physical product, and can be treated consequently under Way No . 1 . Deferral of revenue: Two distinctly separate transactions ought to be accounted for individually. In this case the revenue can be recognized at the time of sales while the cost associated with the warranty is usually accounted for independently. The deal revenue is deferred and recognized as income over the number of years of the warranty period. Proponents believe that it really is inappropriate to recognize revenue at the point of sale since non-e of the services linked to the contract has become rendered and then the revenue had not been earned. This can be fully described in approach 2 . The effect of total revenue acknowledgement at the time of revenue on the industry’s financial assertion will be negative. This is because the share value on the balance sheet becomes significant. Partial Earnings Recognition: is definitely where a firm in this case outlet city shop recognizes a percentage of the total revenue during the time of sales with the remainder...

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