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. 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. How should Loud account for this contract modification? 2. Provide Loud’s new monthly revenue recognition journal entry.
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. 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. How should Loud account for this contract modification? 2. Provide Loud’s new monthly revenue recognition journal entry.
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter17: Advanced Issues In Revenue Recognition
Section: Chapter Questions
Problem 2P: JustKitchens Inc. provides services to restaurants and hotels. The company supplies paper products,...
Related questions
Question
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. 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. | How should Loud account for this contract modification? |
| 2. | Provide Loud’s new monthly revenue recognition |
Expert Solution
Step 1
Part 1 )
The contract modification does not add goods or services to the arrangement; therefore, this modification cannot be treated as a separate contract. However, to determine the appropriate accounting for the modification, the entity has to assess whether the remaining goods and services (18 months of service) are distinct from the goods and services already provided to the customer (handset and 6 months of services).
On July 1, the contract receivable has a remaining balance of $185.37 ( $247.17 - (6 * $10.30))
As a result, the entity has (18*55 - 185.37 )= $990 - $185.37 = $804.63 to allocate to the remaining 18 months of service, or 44.70 per month.
| Statement for Calculation of allocated transaction price | ||||
| Stand Alone Consideration | ||||
| Particulars | Initial Consideration | Selling Price | Selling Price % | Allocated Transaction Price |
| smartphone | 299 | 649 | 29.38 | 546.17 |
| 5G plan (65*24) | 1560 | 1560 | 70.62 | 1312.83 |
| Total | 1859 | 2209 | 100 | 1859 |
Contract Receivable = $546.17 - $299 = $247.17
Amount Already received for 6m = 247.17/ 24 * 6 = 10.30 *6 = 61.8
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Recommended textbooks for you
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:
9781337788281
Author:
James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:
Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:
9781947172685
Author:
OpenStax
Publisher:
OpenStax College
Individual Income Taxes
Accounting
ISBN:
9780357109731
Author:
Hoffman
Publisher:
CENGAGE LEARNING - CONSIGNMENT