Question

A car manufacturer is offering the following incentive with any purchase of its new 2019 mid- size sedans at one of its affiliated dealerships. The vehicle sells for $24,000. Free maintenance services for 2 years at the dealership

Assume there are no other promotions running during this time. The car manufacturer estimates that the normal selling price for the maintenance services it will provide to customers, on average, over the two year period under this promotion is $1,000. Assuming the customer pays $24,000 for the vehicle, how much revenue is recognized on the sale date? You can ignore the time value of money.

Answer 1

Revenue recognised on sale date is $23,000 per vehicle sold

Revenue should be recognised for the products sold in accordance with the revenue recognition principle. The sale of vehicle with 2 year maintenance is a consideration received for both the product as well as the service to be rendered over the 2 year period. Any consideration received in advance from the customer for performance of service obligation in future should not be immediately recognised as revenue in the income statement. Any advance revenue received should be accounted as revenue over the period of time when the performance obligation is satisfied.

The sale of vehicle has 2 components $23,000 the price of vehicle and $1,000 for the maintenance service. The revenue should be recognised for $23,000 for the sale price of vehicle based on when goods are delivered to the consumer. $1,000 is recognised as unearned revenue and should be recognised as revenue as and when the service obligation of maintenance is performed for the vehicle of the consumer.