Question

On January 1, 2018, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data vireless plan for $68.00 per month. The contract includes a smartphone for which the customer pays $289.00. Loud also sells the smartphone and monthly service plan separately. charging $648.00 for the smartphone and $88.00 for the monthly service for the unlimited tak and 5 GB data wireless plan. On July 1, 2019, the customer realizes that she needs less data in her wireless plan and downgrades to the unlimited tak and 2 GB data plan for the remaining term of the contract ( 18 months). The unlimited talk and 2 GB data plan is priced at $51.00 per month. The $51.00 per month is Loud's current stand-alone price for this plan that is available to all customers. Required: 1. How should Loud account for this contract modification? 2. Provide Loud's new monthly revenue recognition joumal entry. 1. How should Loud account for this contract modification? The contract modification add goods or services to the arrangement, therefore, this modification be treated as a separate contract. However, to determine the appropriate accounting for the modification, the entity has to assess whether the remaining goods and services ( 18 months of service) are the goods and services already provided to the customer (handset and 8 months of services). On July 1, the contract receivable has a remaining balance of x As a result, the entity has X to allocate to the remaining 18 months of service, or X per month. General Joumal Shaded cels have feedback. 2. Prepare the joumal entry to record the cash received for the monthly service plan on July 1.

Answer 1

Loud should treat the contract modification as a separate contract. The customer's downgrade to less data constitutes a change in the original service agreement, adding a new service (2 GB plan) and removing another (5 GB plan).

New monthly revenue recognition journal entry:

Date | Account Title | Debit | Credit

-------|--------------|--------|--------

July 1 | Cash | 51.00 |

| Contract Receivable - 2 GB plan | | 51.00

Step-by-step explanation:

Separate contract rationale: The modification alters the original contract's core service offering (data plan), justifying separate accounting treatment. Although it doesn't involve additional goods (smartphone), it significantly changes the customer's service package.

Revenue recognition: Loud recognizes revenue for the new 2 GB plan upon receiving the July payment (51.00). The remaining 18 months of service will be recognized based on the new contract's terms, not the original one.