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Chapter 18: 20BE (page 1033)

Nate Beggs signs a 1-year contract with BlueBox Video. The terms of the contract are that Nate is required to pay a nonrefundable initiation fee of \(100. No annual membership fee is charged in the first year. After the first year, membership can be renewed by paying an annual membership fee of \)5 per month. BlueBox determines that its customers, on average, renew their annual membership three times after the first year before terminating their membership. What amount of revenue should BlueBox recognize in its first year?

Short Answer

Expert verified

BlueBox should recognize revenue of $70 in its first year.

Step by step solution

01

Meaning of Revenue Recognition

Revenue recognition is an accounting concept. Revenue is recognized when goods are exchanged for amonetary value (amount) or when services are performed and a monetary value (cash) is received in return, according to the revenue recognition principle.

02

Amount of revenue recognized by BlueBox in its first year

Customers pay $5 per month as membership fee which means,

Membershipfeefor1year=12month脳Membershipfeepermonth=12脳$55=$60

On average, customers renew annual membership three times, that means,

Annualmembershipfeefor3years=Membershipfeeperyear脳3years=$60脳3=$180

Nate pays $100 to BlueBox as initiation fees

Totalrevenuerecognizedin4years=Annualmembershipfeefor3years+Initiationfee=$180+$100=$280Revenuerecognizedinfirstyear=Totalrevenuerecognizedin4years4=$2804=$70

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Most popular questions from this chapter

Presented below are five different situations. Provide an answer to each of these questions.

1. The Kawaski Jeep dealership sells both new and used Jeeps. Some of the Jeeps are used for demonstration purposes; after 6 months, these Jeeps are then sold as used vehicles. Should Kawaski Jeep record these sales of used Jeeps as revenue or as a gain?

2. One of the main indicators of whether control has passed to the customer is whether revenue has been earned. Is this statement correct?

3. One of the five steps in determining whether revenue should be recognized is whether the sale has been realized. Do you agree?

4. One of the criteria that contracts must meet to apply the revenue standard is that collectibility of the sales price must be reasonably possible. Is this correct?

5. Many believe the distinction between revenue and gains is important in the financial statements. Given that both revenues and gains increase net income, why is the distinction important?

Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay \(100,000 at the beginning of each year (the standalone selling price of the service at contract inception is \)100,000 per year). At the end of the second year, the contract is modified, and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to \(80,000 (the standalone selling price of the services at the beginning of the third year is \)80,000 per year). Briefly describe the accounting for this contract modification.

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

When must multiple performance obligations in a revenue arrangement be accounted for separately?

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).
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