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- May 7, 2018 at 9:42 am #450418
I don’t understand the journal entries below
On 31 January 2017, Terry entered into a contract of a 6-month 4.5G Data and Wifi Plan.
The contract terms are listed as below:
1. The fixed monthly fee is $600 per month; and
2. At the inception stage of the plan, a free Phone is given to Terry for inviting him to join the service plan. The 4G Data Service and the Wifi Service will start on 1 February 2017 and will end on 31 July 2017. Terry pays cash on every month end starting from 28 February 2017.The stand-alone selling prices of the Phone, the 4G Data Service and the Wifi Service are $2,000, $400 per month and $100 per month respectively. The cost of the X-Phone is $1,100. You should assume the X-Phone; the 4G Data Service and the Wifi Service are three separate performance obligations. Perpetual inventory system is adopted.
Prepare journal entries from contract inception up to 31 March 2017.
31-Jan-17 Dr. Contract asset 1440
Cr. Revenue (Phone) 1440
Dr. Cost of sales 1100
Cr Inventory 11001-Feb-17 Dr. Receivable 600
Cr. Contract asset 240
Cr. Contract liability (4G) 288
Cr. Contract liability (Wifi) 72It is part of the entries.
I would like to know why should use Contract liability? As I know Contract liability occurs because of the customer pays consideration before the obligation to transfer goods or services to a customer. In the case, the 4G Data Service and the Wifi Service will start on 1 February 2017 and Terry pays cash on every month end starting from 28 February 2017. That means the services transferred before receiving cash. Why the answer say it is a Contract liability
Please help, thank you
May 7, 2018 at 10:36 am #450420The expression “contract liability” has been used from the viewpoint of Terry – it’s Terry’s liability to pay the $600 each month
I probably would have used the expressions “4G revenue” and “wifi revenue”
But I agree, it’s confusing
OK?
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