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.

Answer 1

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.

Step-by-step explanation:

1. To calculate the transaction price for the smartphone and unlimited talk and 5 GB data wireless plan, we'll allocate consideration based on stand-alone prices. The stand-alone price for the smartphone is $649 and the stand-alone price for the monthly service plan is $65. Since the customer pays $299 for the smartphone in the contract, the remaining consideration is for the monthly service plan.

The total consideration for the 2-year contract is $299 (for the smartphone) + ($65/month x 24 months) = $299 + $1,560 = $1,859.

2. The initial journal entry for the sale of the 2-year contract on January 1, 2017, would be:

Debit: Accounts Receivable - $1,859

Credit: Contract Liability - $1,859

The monthly journal entry would be:

Debit: Contract Liability - $65

Credit: Service Revenue - $65