Case 09-1, Velocity Cellular Essay

864 Words Apr 30th, 2012 4 Pages
MEMORANDUM

To: Dr. John J. Morris, Department of Accounting
From: Group # 5 (Amanda Picht, Qinxi Fan, Mengnan Zhang)
Date: April 10, 2012
Subject: Acctg 642: Case 09-1, Velocity Cellular

Statement of Facts
Velocity Cellular Services is a company that sells wireless services and products based on the Global System for Mobile Communications (GSM) standard. Under the GSM standard, an activation card is necessary for every subscriber. The company is promoting Power Starterpack, a prepaid phone service plan to existing wireless subscribers. Each subscriber of this plan will get a new activation card and a nonrefundable prepaid fee of $200. The $200 prepaid voucher
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The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s). II. Subparagraph superseded by Accounting Standards Update No. 2009-13. III. If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. C. ASC 605-25-55-1 depicts a flow chart; it graphically summarizes ASC 605-25-25-5, and states that an item qualifies as a multiple deliverable arrangement if a right of return exists or is not applicable.
2. Velocity Cellular should allocate the $200 nonrefundable fee between the activation card and the airtime card (prepaid voucher). The activation card should be recognized as revenue at the point of purchase, while the airtime minutes should be recognized at their point of use (as revenue is earned). A. ASC 605-25-30-2 states that an arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price (the relative

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