Fair Value Method

1. Running Treadmills Inc. is a specialty treadmill manufacturer that includes a 24-month
warranty on all treadmills that it sells. Running Treadmills sells the Extreme Climber for
$45,000. The fair value of the component parts is estimated to be $40,000 for the treadmill
and $10,000 for the warranty. Running Treadmills allocates revenues to the component
parts using the relative fair value method. Its policy is to recognize revenue from the sale of
warranties on a straight-line basis over the life of the warranty.
Assume an Extreme Climber is sold on December 1. What is the total revenue reported by
Running Treadmills in the month of December for this sale?
a) $36,000
b) $36,375
c) $45,000
d) $50,000

2. Rickard Manufacturing Inc. provides for doubtful accounts based on 3% of credit sales. The
following data are available for 20X5:
Total sales during 20X5 $4,000,000
Credit sales as a percentage of total sales 80%
Allowance for doubtful accounts January 1, 20X5 $60,000 CR
Collection of accounts written of in prior years $9,000
Customer accounts written off as uncollectible during 20X5 $35,000
What is the balance of the allowance for doubtful accounts for Rickard Manufacturing as at
December 31, 20X5?
a) $96,000
b) $121,000
c) $130,000
d) $154,000