P4-9) A car manufacturer provides a warranty for five years on sales of new vehi
ID: 2427917 • Letter: P
Question
P4-9) A car manufacturer provides a warranty for five years on sales of new vehicles. The following table provides information relating to two car models the company produces and sells:
Using the relative fair value method, compute the revenue that would be (i) recognized upon delivery of the vehicle, and (ii) deferred and recognized over five years of each of the car models.
Car model Sale price Estimated fair value of car Estimated fair value of warranty Nova $15,000 $14,000 $1,500 Pinto $18,000 $15,000 $2,000Explanation / Answer
revenue that would be recognized upon delivery is the fair value of car i.e. 14000+15000 = $29000
the warranty value will be recognised in five years = 1500+1200 = 2700
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