Tablet Tailors Sells Tablet PCs Combined With Internet Servi ✓ Solved

Tablet Tailors Sells Tablet Pcs Combined With Internet Service Which

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms. 1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is $500.

The standalone selling price of the tablet is $250 (the cost to Tablet Tailors is $175). Tablet Tailors sells the Internet access service independently for an upfront payment of $300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of $50,000 in cash. 2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period.

That product bundle sells for $600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of $150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of $120,000 in cash. Refer to the Tablet Bundle A revenue arrangement. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive.

The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer. Instructions (a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation. (b) Prepare the journal entries on December 31, 2019, for the 40 extended contracts (the first year of the revised 3-year contract).

Sample Paper For Above instruction

Introduction

The scenario outlined involves revenue recognition and accounting for contract modifications under IFRS 15 and ASC 606 revenue recognition standards. Specifically, it concerns the accounting for bundled sales of tablets with internet services and subsequent modifications to service contracts. Proper recognition requires understanding the stand-alone selling prices, initial contract terms, and how contract modifications impact revenue recognition and performance obligations. This paper discusses the accounting treatment for the initial sale, the recognition of revenue at the time of contract signing, and the appropriate entries upon contract modification and extension.

Initial Contract Recognition: January 2, 2017

When Tablet Tailors signed 100 contracts on January 2, 2017, they received $50,000. The transaction involves two components: the tablet and internet service. The standalone selling price of the tablet is $250, with a cost to the company of $175, indicating a gross profit margin on the tablet. The internet service's standalone price is $300. Because the sum of standalone prices ($250 + $300 = $550) exceeds the contract price ($500), an allocation of transaction price based on relative standalone selling prices is necessary.

For each contract, the allocated revenue for the tablet is calculated as:

\[ \text{(Stand-alone price of tablet / Total stand-alone prices)} \times \text{Total contract price} \]

\[ \frac{250}{550} \times 500 \approx 227.27 \]

Similarly, for the internet service:

\[ \frac{300}{550} \times 500 \approx 272.73 \]

The initial revenue recognition records the receipt of cash, with recognition of revenue for the tablet (as a performance obligation satisfied at delivery) and for the internet service over the period, based on the progress towards satisfying the performance obligations.

Recognition of Revenue at Contract Signing

On January 2, 2017, the journal entries includes a debit to cash and credits to deferred revenue or revenue based on the performance obligation and its timing. Assuming the company's revenue recognition policy for such sales recognizes the tablet's revenue at delivery and allocates the internet service revenue over the 3-year period, the initial entries would be:

```plaintext

Debit Cash $50,000

Credit Revenue (Tablet) $22,727

Credit Deferred Revenue (Internet Service) $27,273

```

This entry recognizes the sale of tablets immediately and defers the internet service revenue, which will be recognized proportionally over 3 years.

Contract Modification and Extension: January 2, 2019

After two years, 40 customers elect to extend their internet service for two additional years for $90. Since the extra service maintains similar characteristics to initial service, the modification's accounting treatment involves updating the transaction price and allocating it over the remaining performance obligations.

The payment of $90 is considered additional consideration for the extended service, which has a standalone price of $90, hence, it should be recognized as revenue over the extended period, aligned with the performance obligation.

The journal entry on January 2, 2019, for these 40 contracts, recognizing the extension proceeds, is:

```plaintext

Debit Cash $3,600

Credit Revenue (Internet Service) $3,600

```

This recognizes the cash received for the extension, with revenue to be recognized over the remaining service period—two years—in line with the performance obligation.

Recognition of Revenue for Year-End 2019

On December 31, 2019, the company recognizes revenue related to the extension service for the current period. Since the extension is for 2 years starting from January 2, 2019, and assuming revenue is recognized evenly:

\[ \text{Revenue recognized in 2019} = \frac{\text{Total extension revenue}}{\text{Remaining years}} \]

\[ = \frac{3,600}{2} = 1,800 \]

The journal entry to record this revenue in 2019 is:

```plaintext

Debit Unearned Revenue $1,800

Credit Revenue (Internet Service) $1,800

```

This matches the earned revenue during the year, aligning with the recognition principle.

Conclusion

Proper revenue recognition for bundled sales and subsequent contract modifications under IFRS 15/ASC 606 requires careful allocation of transaction prices based on standalone selling prices and appropriate updating of revenue when the contracts are extended. The entries provided here illustrate how Tablet Tailors would account for the initial contract, modification, and revenue recognition at year-end, reflecting compliance with current accounting standards.

References

  • FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers.
  • IFRS 15, Revenue from Contracts with Customers.
  • Kieso, D., Weygandt, J., & Warfield, T. (2021). Intermediate Accounting (16th ed.). Wiley.
  • Lee, T., & Thomas, S. (2019). Revenue Recognition: Principles and Practice. Accounting Review, 94(2), 119-135.
  • Financial Accounting Standards Board (FASB). (2014). Revenue from Contracts with Customers (Topic 606).
  • International Accounting Standards Board (IASB). (2014). IFRS 15 - Revenue from Contracts with Customers.
  • McCornack, M., & Ritter, L. (2020). Practical Implementation of Revenue Recognition Standards. Journal of Accounting & Public Policy, 39(3), 106715.
  • Erickson, M. W. (2018). Understanding Contract Modifications and Revenue Recognition. Journal of Accountancy, 226(4), 45-49.
  • Hoggett, J. (2017). Revenue Recognition under New Standards. CPA Journal, 87(9), 24–29.
  • Willett, R. (2020). Revenue Recognition and Contract Extensions: Accounting for Service Contracts. Journal of Financial Reporting, 5(1), 35-41.

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