Question

Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,800,000 at December 31, 2010 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $450,000 at December 31, 2010.Service contracts still outstanding at December 31, 2010 expire as follows:During 2011 $380,000During 2012 570,000During 2013 350,000What amount should be reported as Unearned Service Revenues in Eaton's December 31, 2010 balance sheet?a. $1,350,000.b. $1,300,000.c. $850,000.d. $500,000.

Answer 1

Answer:

The correct answer is b. $1,300,000

Explanation:

The computation of unearned service revenue is shown below:

= Outstanding service contracts for 2011 + Outstanding service contracts for 2012 + Outstanding service contracts for 2013

= $380,000 + $570,000 + $350,000

= $1,300,000

The other amounts are not considered in the computation part. So, it is ignored.

Thus, the $1,300,000 is the amount which should be reported as Unearned Service Revenues in Eaton's December 31, 2010 balance sheet.

Hence, the correct answer is b. $1,300,000