Main Street Service Co. has achieved fast growth in the St. Louis area by selling service contracts on large appliances, such as washers, dryers, and refrigerators. For a fee, Main Street agrees to provide all parts and labor on an appliance after the regular warranty runs out. For example, by paying a fee of $200, a person who buys a dishwasher can add two years (years 2 and 3) to the regular one-year (year 1) warranty on the appliance. In 2009, the company sold service contracts in the amount of $1.8 million, all of which applied to future years. Management wanted all the sales recorded as revenues in 2009, contending that the amount of the contracts could be determined and the cash has been received. Discuss whether you agree with this logic. How would you record the cash receipts? What assumptions do you think Main Street should make? Would you consider it unethical to follow management’s recommendation? Who might be hurt or helped by this action?

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February 23, 2012

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