Answered: On January 1, 2019, Loud Company enters…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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 journal entry.

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

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