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Hi Mike,
I have a question in regards to revenue recognition.
If a company has a year end of April 2014.
They have 10,000 customers who sign up to a promotion for a phone contract on 1st March 2014.
They pay a monthly fee of £30 at the end of each month therefore by the year end they will have made two payments.
Would we only recognise £60 for each person or would we take into account the price of the handset (£250), the network access (£5) and free minute price (10).
Im confused as the risk and reward, and ownership of the handset has been transferred therefore normally we would normally recognise this. However with it being a contract over 12 months would we only recognise the monthly payments? Would we discount the sale price to present value for the headset as it is a non cancellable contract?
The requirement of the question is to advise how we would account for the above.
Thank you 🙂
Headset? Did you mean handset?
Is the handset recoverable or does ownership pass? If it passes, then recognise that value in full. If it doesn’t pass, then effectively it’s being rented from us so time apportion the value
Network access and free-minute price seems to me to accrue throughout the year so spread the revenue relating to those two elements?
Strictly, yes, it should be discounted but the value is likely to be so immaterial that it really isn’t worth it
Sorry i meant handset.
There is no information which states the phone is recoverable. The info only says it is a non cancellable contract.
Therefore am i correct in understanding we would recognise the £250 per 10,000 customers in this years financial statements as the phone has been given to the customer therefore all ownership, risk has been transferred.
Whereas the service part of it will only be accounted for as we go along therefore £15 per 10,000 employee for both March and April.
My question is then as we are only receiving £30 per month what do we do with this?
Sorry for all the questions – im struggling with P2 and trying to understand it the best i can.
Thank you
Set the $250 handset element up as a receivable (Dr Receivables, Cr Revenue)
When cash is received, some of the payment relates to settlement of the handset receivable and the rest is in payment of the monthly revenue.
The monthly entry required will then be:
Dr Cash $30
Cr Receivables $15 (handset element)
Cr Revenue $15 (service element)Ok?
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