Leeds Used Cars (Leeds) is a regional reseller of used vehicles. Leeds current revenue recognition policy is to record 100% of the revenue on used car sales when the customer drives the car out of the lot.

In an effort to be more competitive, Leeds has recently made two major changes to its sales contracts: offering free basic servicing and a no-fee return policy, details of which are below. Leeds controller has been asked by the chief financial officer (CFO) to determine the effect of the new policies on revenue recognition. Leeds reports under ASPE.

Basic servicing

Last month, Leeds began offering customers free basic servicing on their vehicles for a one-year period after purchase. Basic servicing includes oil changes, filter cleaning, tire rotation, and a 50-point inspection. Customers are entitled to four service appointments in the one-year period. Management expects that approximately 80% of customers will request servicing, with an average of three services per year. The servicing is completed at Leeds servicing division, which typically charges customers $45 per service.

No-fee returns

Starting two months ago, Leeds sales contracts include a one-week, no-fee return policy. Any customer that no longer wants their car, for whatever reason, is able to return the car with no fees. Based on the two months that the policy has been in place, management estimates that approximately 3% of cars sold will be returned.

Required:

Prepare the notes for a meeting with the CFO to explain how the contract changes will impact Leeds revenue recognition under ASPE 3400 Revenue. Use the Issue-AnalysisRecommendation (IAR) approach to structure the analysis.