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.

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. Additional Instruction

	Initial	Stand-Alone	Allocated
	Consideration	Selling Price	Transaction Price
Smartphone
5 GB plan
Total consideration

Additional Instruction

Allocate using two one-hundreds of a percent. For example: $649 / $2,209 = 29.38% and round your answers to the nearest cent.

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