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Issue 4:Unearned Service Revenue The unearned service revenue of $22,100 is the result of a number of one year service policies sold late in December

Issue 4:Unearned Service Revenue

The unearned service revenue of $22,100 is the result of a number of one year service policies sold late in December as an "experiment."The policies are sold at an average of $900 per year per customer; the $22,100 represents the total cash received as of year-end.The $900 per customer amount was arrived at by an analysis of previous service provided on a "fee for service" basis to customers.The average cost to KCN was approximately $200 per visit, with an average of 1.7 visits per year to customers.While the service policies allow unlimited visits for service, KCN has limited the number of policies available due to difficulties in calculating the costs associated with such policies.KCN estimates that while the number service calls is likely to increase (the guess is from 1.7 to 3 or 4 per year), the cost is likely to decrease to around $100 per call.

Since these policies were sold so late in the year, no income need be recognized at this point.Yet, KCN has made no entry to record expected expenses related to this revenue.

What entry or disclosure, if any, is necessary in this circumstance?

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