Reference no: EM132538440

Oshawa Motors Ltd., a public company, operates car dealerships that has two types of operations - car sales and service. It has a December 31st yearend. The company provides incentives to its sales team to sell maintenance packages along with the sale of cars.

Consider the following offer posted on one of the car windows:

                                                                              PRICE

Car                                                        $45,000

Basic Service Package (2 years)                     2,000

Premium Service Package (4 years)                 4,000

Complete car package                                   $51,000

Special offer if all items are purchased together  $47,500

You save                                                       $3,500

• The basic service package covers routine items for the first two years. The premium package covers items not covered by the basic package for a period of four years from the purchase date.

• As is typical in auto industry, the salesperson has considerable latitude in adjusting the price to "close the deal". On December 29, 2019, a customer signed an agreement to buy the complete car package outlined above for $46,500 and paid a $3,000 non-refundable deposit. The car was delivered to the customer on January 1, 2020.

• The president of Oshawa intends to recognize the entire sales amount of $46,500 in December 31, 2019 financial statements. Assume that the three prices (for car, basic service and premium service) reliably reflect the stand-alone selling price of these items.

Question 1: Being an accountant. Do you agree with the president's intended treatment of the December 29th transaction? Provide reasons - make reference to the revenue recognition criteria we discussed in class. If disagree, determine the amount of revenue believe Oshawa should recognize in 2019, 2020 and 2021. All supporting calculations needs.