Question

REVENUE RECOGNITION
If you sign up for and receive a new phone that would normally retail for $500 (cost to manufacture $380). We commit to a three year contract where we will have to pay back an amount that starts at $600 (to pay for the phone) but drops each month until it reaches zero at the end of 3 years (kind of like financing for the phone). We pay an activation fee of $35 along with the first month of service that will be $70 each month for the next 36 months. After one year of service, we will be eligible for $100 off the latest phone if we trade in the one year old phone for a new one. That rises to $200 after two years.

Show all journal entries needed to show revenue recognition.

Answer 1

This question is based on five step model of revenue recognitions but we have pass a neccessory journal entry

Working

Cost price of cell phone = $ 380

selling price of cell phone = $500

profit on sale =$120 ($500 - $380)

installment price = $600

interest would be = $100

Calculation of interes for every instalment per year

year	amount of loan	principal	interest amount
1	$500	$150 ($200 -(100*3/6)	$50 (100*3/6)
2	$350 ($500 - $150)	$167 ($200 - (100*2/6)	$33 (100*2/6)
3	$183 ($350 - $167)	$183 ($200 - (100*1/6)	$17 (100*1/6)