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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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Assume the same facts as in El7-5. On July 1, 2019, the customer realizes that she needs less data in her wireless plan and downgrades to the unlimited talk and 2 GB data plan for the remaining term of the contract (18 months). The unlimited talk and 2 GB data plan is priced at $55 per month. The $55 per month is Loud’s current stand-alone price for this plan that is available to all customers.

Required:

  1. 1. How should Loud account for this contract modification?
  2. 2. Provide Loud’s new monthly revenue recognition journal entry.

1.

To determine

State the manner in which the Company L must account for the contract modification.

Explanation

Contract modification:

In a contract, Companies generally modify the respective rights and performance obligations. An agreed-upon change in the goods or services that must be delivered or the contract’s price is known as a contract modification and it is also referred as contract amendment or change order.

  • Goods and services are not added to the management by the contract modification. Thus, this modification is not treated as a separate distinct contract. On the other hand, to ascertain the proper accounting for the modification, the company must assess whether the existing good and services (for 18 months of service) are distinct from the goods and services previously provided to the customer (handset and 6 months of service)
  • At contract inception, Company L ascertained that each month of wireless data service is distinct. Consequently, at the date of the modification, Company L states that the remaining monthly services are distinct from the smartphone and unlimited talk and data previously provided to the customer...

2.

To determine

Journalize the Company L’s new monthly revenue recognition journal entry.

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