Question

1. Gaga Ltd. sells home appliances on installment contracts. Gaga Ltd. also offers a separate service contract on each appliance sold at a cost of $5,000 that must be paid in full at the time of sale. Assume that Gaga Ltd. sells 10 appliances and service contracts on December 31, 2019. Record the journal entry related to the service contracts.

Answer 1

Answer :-

Note:-

As per Revenue recognition principle, the revenue can be recognised only when the performance obligation related to the contract is satisfied. If any amount received in advance, then those advance can be treat as liability. The liability which was recognised earlier can be reversed and recognise the revenue only when the performance obligation associated with the contract fulfiled or satisfied.

Journal Entry related to Service Contract :-

1. Journal entry at the time of sale of service contract :-

Date	Particulars	Debit (In $)	Credit (In $)
Dec 31, 2019	Cash (10*$ 5,000)	$ 50,000
	Service contracts liability		$ 50,000
	(To record the sale of service contracts which can be satisfied in later date.)

2. Journal entry at the time of fulfilment of service contract :-

Date	Particulars	Debit (In $)	Credit (In $)
1	Service contracts liability	$ 50,000
	Service contracts revenue		$ 50,000
	(To record the revenue from the service contracts)