On January 1, 2017, Loud Company enters into a 2-year contract with a customer f
ID: 2512889 • Letter: O
Question
On January 1, 2017, 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. 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. Record the initial journal entry for Loud Company’s sale of a 2-year contract on January 1, 2017, and the monthly journal entry.Explanation / Answer
1.Calculation of Transaction price
Standalone price of handset $ 649
Standalone price of services $ 1560 ($ 65 * 24 month)
Total value/ considerations of contract = $ 2209
Transaction price
Consideration received for handset $299
Consideration for service $ 1560
Total (299+1560). $ 1859
Allocation of transaction price
Handset. ( 649/2209) * 1859 = $ 546.17
services. (1560/2209) * 1859 = $ 1312.83 for 24 months ie 54.70dollars per month
The contract asset at time of revenue recognition on handset will be established
Amount of the contract assets will be Revenue recognition on handset - cash received
ie. $ 546.17 - $ 299 = 247.17 and will be impaired in the proportion of service charges allocated to handset revenue over the service period. $ 10.30 per month. (We received 1560 dollars for service but allocate 1312.83 to service the difference is allocated to revenue of handset.)
Journal Entry on the date of contract
Cash. Debit 299
Contract assets. Debit. 247.17
Revenue from sale of handset. credit 546.17
Monthly journal entry
Cash. Debit. 65
Service Revenue credit. 54.70
Contract assets. (Impair) Credit. 10.30
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