Question: Central Appliance Service Co Inc has achieved fast growth by
Central Appliance Service Co., Inc., has achieved fast growth by selling service contracts on large appliances, such as washers, dryers, and refrigerators. For a fee, the company 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 to the regular one-year warranty on the appliance. In 2014, 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 2014, contending that the amount of the contracts could be determined and the cash had been received. Do you agree with this logic? How would you record the cash receipts? What assumptions do you think Central Appliance 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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