On January 1, 2017, BT&T Company Enters into a 2-Year

question 12

Essay

On January 1, 2017, BT&T Company enters into a 2-year contract with a customer for an unlimited talk and 10 GB data wireless plan for $70 per month. The contract includes a smartphone for which the customer pays $200. BT&T also sells the smartphone and monthly service plan separately, charging $700 for the smartphone and $65 for the monthly service for the unlimited talk and 10 GB data wireless plan.
Required:
a. Determine the transaction price for each performance obligation, assuming that
BT&T Company allocates the transaction price based on stand-alone prices.
b. Record the initial journal entry for BT&T Company's sale of a 2-year contract on
January 1, 2017, and the monthly journal entry.
c. On January 1, 2018, the customer realizes that she needs less data in her wireless plan and downgrades to the unlimited talk and 2 GB data plan for the remaining term of the contract 12 months). The unlimited talk and 2 GB data plan is priced at $50 per month, which is the BT&T current stand-alone price for this plan that is available to all customers. Provide BT&T's new monthly revenue recognition journal entry.

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Definitions:

Market Price

The cost at which a product or service is made available in the market, dictated by the forces of supply and demand.

Economic Profit

The difference between total revenue and total costs, including both explicit and implicit costs, indicating the profit beyond the normal return on investment.

Marginal Decision Rule

A principle stating that an action should be taken if, and only if, the marginal benefits are greater than or equal to the marginal costs.

MR

Short for Marginal Revenue, it refers to the extra revenue that an organization receives from selling one more unit of a good or service.