1). Which of the three approaches to accounting for extended warranty and service contracts is most consistent with the actual substance of a sales transaction involving equipment and an extended warranty contract? Approach number one, the Full revenue recognition is the most consistent due to the reasons which are demonstrated on exhibit two according to the Financial Accounting concept No.5. As stated in this exhibit, Revenues must be both realized and earned prior to the recognition. In this case, after selling the goods and services Circuit city at that point of sale both revenue and earnings have been realized because goods have exchanged hands. At this point of time, even though the cost services haven’t been used, there is a clear agreement and assurance that the necessary services will be rendered during the period of the warranty Further in exhibit 2 it states four key components which justifies that the Full Revenue Approach is the best match of the sale of product and extended warranty because at the time of sale an entity will be considered to have substantially completed the earning process if: 1). It incurs the selling cost
2). It has established service network, which is there for the most part to provide the customers with the service associated with the manufacturer’s warranty. 3). Relatively few customers call for service during the extended period 4). Estimates can be made with relative certainty as to future costs to be incurred under the extended warranty. Under these facts, Circuit city had met all the qualifications to report their revenues as they did. The system was in place and the reporting of revenues didn’t seem to have any discrepancies. The information users (Share holders) seem to be happy with the results. Concurrently the profitability of the company as a whole appears to be fully maximized. 2).Why is this revenue reporting strategy is an issue to Circuit stores Inc? There is couple of reasons why senior vice president...
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