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Question on Revenue

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Question on Revenue

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • May 7, 2018 at 9:42 am #450418
    torresxdd
    Member
    • Topics: 24
    • Replies: 11
    • ☆

    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 1100

    1-Feb-17 Dr. Receivable 600
    Cr. Contract asset 240
    Cr. Contract liability (4G) 288
    Cr. Contract liability (Wifi) 72

    It 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 #450420
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23327
    • ☆☆☆☆☆

    The 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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    Posts
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