Question

Provide the journal entries for Apple to sell a single iPhone for $800 under both subscription and upfront recognition methods. Include journal entries to record cost of goods sold, including your estimate of this amount??Use excel picture to answer?

Answer 1

The options provided are the 2 methods for revenue recognition.

Subscription Method

Under Subscription method, we would need to assume that the revenue from the iPhone is spread accross its life. We would need to split the $800 subscription across multiple months.

At the time of the sale we would record the following Journal:

Unearned Revenue

Sale of iphone	Debit	Credit
To Cash/Customer Receivable	800
Unearned Revenue		800

we would simaltaneously record an entry for the Unearned Revenue. Assuming the cost of an iphone is 50% of the sales price:

Cost Deferred to future periods	Debit	Credit
Deferred Expenditure	400
Inventory of iPhone		400

Assuming that the benefits derived by apple from the sale of an iPhone is 2 years, we would split it across 24 months. Each month, we would need to pass the following journals:

	Debit	Credit
Unearned Revenue	33.33
Revenue from iphone sales		33.33

The revenue recognized per month is 800/24 = 33.33.

Simaltaneously we would record the corresponding cost:

	Debit	Credit
Cost of goods sold	16.67
Deferred Expenditure		16.67

Upfront Method

The upfront method is much more simplified in that we record the revenue and cost upfront. The following entries are passed in case of the upfront method:

Sale of Iphone	Debit	Credit
Cash	800.00
Revenue from iphone sales		800.00
Cost incurred on sale of Iphone	Debit	Credit
Cost of goods sold	800.00
Inventory of Iphone		800.00