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. On July 1, 2017, 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.

Answer 1

Solution:-

1. How should Loud account for this contract modification?

Given information,

The unlimited talk and 2 GB data plan is priced = $55 per month

Unlimited talk and 2 GB data plan for the remaining term of the contract = 18 months

Customer pays for smart phone = $299

• Here, we need to calculate the contract modification.

Contract modification = 2 GB data plan + Customer pays for smart phone

Where ,

Total cash collected in 18 months for 2 GB data plan = number of months * cash per month

= 18 * 55

= $990

Total cash collected in 18 months for 2 GB data plan = $990

Contract modification = 990 + 299

= $1,289

Contract modification =  $1,289

Contract modification =  $1,289

2. Provide Loud’s new monthly revenue recognition journal entry:-

Date	Particulars	Debit	Credit
January 1, 2017	Cash	= $55 + $12.458 = $67.458
	Contract receivable		= 900 / 18 months = $55
	Sales revenue		= 299 / 2 years = 299 / 24 months = $12.458