Pure Train Case Study

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If Pure-Train sells extended warranties to its customers for a fee, it indicates that a contract is separately priced. This implies that the extended warranties provide a warranty protection or product services that are not included in the acquisition price of the product covered by the contract (FASB ASC 605-20-25-1). FASB also states that extended warranty provides “coverage against the risk of certain specified claim costs for a specified period” (FASB ASC 605-20-25-2). For example, if the customer requests a covered service to be performed on the product that needs repair or service costs, such claim costs are considered repair costs (FASB ASC 605-20-25-2). Under the new rules, revenue from extended warranty contracts should be recognized in income over the period of the contract (FASB ASC 605-20-25-3).…show more content…
However, in circumstances where it is sufficiently evident that the costs of providing services under the contract are incurred on other than a straight-line basis, revenue must be “recognized over the contract period in proportion to the costs that are expected to be incurred in performing services under the contract” (FASB ASC 605-20-25-3). Since the extended warranties demand that Pure-Train provide customer service and repair in 36-months, the revenue must be recognized in income over this contract period. As mentioned above, the revenue from these contracts needs to be deferred and recognized in income on a straight-line basis over the contract period. This could result in being recognized as revenue evenly over the contract
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