Detailed Answer
(a) The revenues from service contracts should be recognized
on a pro rata basis over the term of the contract. This
treatment allocates the contract revenues to the period(s) in
which they are earned. Since the sale of a service contract does
not culminate in the completion of the earnings process (i.e.,
does not represent the seller’s performance of the contract),
payments received for such a contract should be recorded initially
in a deferred revenue account.