Future Shop was established in 1982 in Vancouver and has over 120 locations across Canada. It is
Question:
Many of the products stocked by Future Shop have warranties provided by the manufacturer, typically ranging from 90 days to one year. In addition to these manufacturer€™s warranties, Future Shop offers its customers, for a fee, €œProduct Service Plans.€™€™ The box on the next page provides a description of the Product Service Plan, courtesy of Future Shop.
The fee and the coverage under the Product Service Plan differ according to the type of product and the option chosen by the customer. As a representative example, Future Shop offers the following coverage for a $1,500 television:
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Similar to its subsidiary, Best Buy also offers similar service plans.
The PSPs are highly profitable for Future Shop. On average, the cost of fulfilling the guarantee is well under a third of the fee charged to the customer. Because of this low cost, the company is considering a short-term promotion whereby customers would receive, for no additional charge, the shortest PSP available for the product purchased. The customer can obtain a longer PSP by paying the differential. In the above example, a customer who purchases the $1,500 television would receive the two-year plan for free, but could pay $60 to obtain the four-year coverage.
Required:
Assume that it is the first year that the company has offered the Product Service Plans. As the company€™s controller, prepare a memo to Future Shop€™s CFO explaining the accounting issues surrounding the PSP and how it affects the accounting for products sold. Assume that the company follows the guidance provided by IFRS.
Step by Step Answer:
To CFO From Controller Subject Impact of Product Service Plan on accounting for products sold The accounting issues relating to the Product Service Plan PSP or the Plan principally concern the transfe...View the full answer
