Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, non-refundable fee of $300 and a usage fee of $5 per month. Students may renew the service for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?
Campus Cellular acknowledges revenue of $210.
GAAP guidelines help define different revenues for different situations, this process is known as revenue recognition. When a significant event occurs, revenue is typically documented, and monetary amounts for the company are easily measured.
The total cost of the transaction is $420. In that instance, Campus Cellular is offering a service without charging a price in the second year. As a result, the upfront price should be recorded twice as revenue. As a result, in both year 1 and year 2, Campus Cellular acknowledges revenue of $210.
Non-refundable fee = $300
Usage fee = $5 per month
(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for $200,000. In addition, as part of the contract, a performance bonus of $40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.
(a) Determine the transaction price that Concrete Always should compute for this agreement.
(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.
(Determine Transaction Price) Blair Biotech enters into a licensing agreement with Pang Pharmaceutical for a drug under development. Blair will receive a payment of $10,000,000 if the drug receives regulatory approval. Based on prior experience in the drug-approval process, Blair determines it is 90% likely that the drug will gain approval and a 10% chance of denial.
(a) Determine the transaction price of the arrangement for Blair Biotech.
(b) Assuming that regulatory approval was granted on December 20, 2017, and that Blair received the payment from Pang on January 15, 2018, prepare the journal entries for Blair. The license meets the criteria for point-in-time revenue recognition.
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.
(b) Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2017, and December 31, 2017.
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