Ferris, Inc., sells heavy machinery with a base unit price of $10,000. Ferris offers an optional service agreement for an initial three-year period for $1,500.
a. Explain how Ferris should recognize revenue for its contract with a customer that chooses to take the optional service agreement.
b. Assume the optional service agreement is initially recorded in a liability account (e.g., revenue received in advance), record the sale and subsequent accounting for $400 of service work that is performed.