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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan.

Required:

  1. 1. Calculate the transaction price for the smartphone and unlimited talk and 5 GB data wireless plan assuming that Loud allocates consideration based on stand-alone prices.
  2. 2. Record the initial journal entry for Loud Company’s sale of a 2-year contract on January 1, 2019, and the monthly journal entry.

1.

To determine

Compute the transaction price.

Explanation

Transaction price:

Transaction price is the amount of consideration that is estimated by the company to be authorized in exchange, for delivering the promised goods and services to the customer. Transaction price is examined by the seller by analyzing the terms of the contract and the normally conducts of the business.

Calculate the amount of transaction price:

 Initial ConsiderationStand-alone selling priceAllocated transaction price
Smartphone$299 $649 $546.17(2)
5 GB plan$1,560(1)$1,560 $1,312.83(3)
Total consideration$1,859$2,209$1,859

Table (1)

  • The transaction price allocated for the smartphone is identified as revenue when the customer takes ownership of the handset (at the time of sale).
  • The $1,312.83 service revenue is identified over the 2-year contract term (or $54.70 per month). A contract receivable of $247.17 is recognized at the time the smartphone revenue is identified, signifying the difference between the revenue recognized and the cash received initially.

Note: The amount of stand-alone price for 5 GB plan is same as its initial consideration ($1,560).

Working notes:

(1)Calculate the initial consideration for 5 GB plan:

Initialconsiderationfor5GBplan}=Costoftheplanpermonth×Contracttimeperiod=$65×24months(2years)=$1,560

(2)Calculate the allocated transaction price for smartphone:

2.

To determine

Journalize the initial entry for company L’s sale of a 2-year contract on January 1,2019 and the monthly  journal entry.

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