Pleasant Co. manufactures forte motorcycle accoutrements. The company is known for merchandise quality, and it has offered one of the best guarantees in the industry on its higher-priced products—a life-time warrant, executing all the guarantee work in its ain stores. The guarantee on these merchandises is included in the gross revenues monetary value. Due to the recent debut and growing in gross revenues of some merchandises targeted to the low monetary value market, Pleasant is sing partnering with another company to make the guarantee work on this line of merchandises, if clients purchase a service contract at the clip of original merchandise purchase. Pleasant has called you to rede the company on the accounting for this new guarantee agreement. Instruction manuals

If your school has a subscription to the FASB Codification, travel to log in and fix responses to the followers. Provide Codification mentions for your responses. ( a ) Identify the accounting literature that addresses the accounting for the type of individually priced guarantee that Pleasant is sing. ( B ) When are warranty contracts considered individually priced? ( degree Celsius ) What are incremental direct acquisition costs and how should they be treated?

Solution

( a ) FASB ASC 605-20-25 addresses how gross and costs from a individually priced drawn-out guarantee or merchandise care contract should be recognized.

( B ) An Drawn-out Warranty is an understanding to supply guarantee protection in add-on to the range of coverage of the manufacturer’s original guarantee, if any, or to widen the period of coverage provided by the manufacturer’s original guarantee. Product Maintenance Contracts are understandings to execute certain agreed-upon services to keep a merchandise for a specified period of clip. The footings of the contract may take different signifiers, such as an understanding to sporadically execute a peculiar service a specified figure of times over a specified period of clip, or an understanding to execute a peculiar service as the demand arises over the term of the contract.

Individually Priced Contracts are understandings under which the client has the option to buy an drawn-out guarantee or a merchandise care contract for an expressly stated sum offprint from the monetary value of the merchandise. FASB ASC 605-20-20-20 ( Glossary )

( degree Celsius ) Costs that are straight related to the acquisition of a contract and that would hold non been incurred but for the acquisition of that contract ( incremental direct acquisition costs ) shall be deferred and charged to write off in proportion to the gross recognized. All other costs, such as costs of services performed under the contract, general and administrative disbursals, advertisement disbursals, and costs associated with the dialogue of a contract that is non consummated, shall be charged to write off as incurred. FASB ASC 605-20-25-4