The third approach is most consistent with the actual substance of sales transactions involving equipment and an extended warranty contract. Revenue from warranty has to be recognized when a period of a warranty is fulfilled. It would be wrong to consider revenue from the sale of an extended warranty or product maintenance contract at the time of sale since the company is still liable or obliged to the customers with the warranty. All are major elements of Partial Revenue Recognition on the sale of extended warranty and product maintenance contracts were applied in the Circuit City case since it was mentioned in the text that the sales has rapidly grew from $705 million in 1986 to $2.1 billion in 1990. This is when the company had introduced the extended warranty contracts and the profit margin form the extended warranty sales were high in comparison to the profit margin from the sale of products. The warranty contract relates to the product sold by Circuit City where the pricing of the sale of the extended warranty is an integral part of pricing the related product. The issue o......

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