Instructions On January 1, 2017, Loud Company enters into a 2-year contract with
ID: 2588834 • Letter: I
Question
Instructions On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan. On July 1, 2017, the customer realizes that she needs less data in her wireless plan and downgrades to the unlimited talk 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 $55 per month. The $55 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 journal entry.Explanation / Answer
1) The contract modification has to be done from $65 per month to $55 per month for 18 months. Earlier contract balance outstanding on July 1st for $1,170 to be reversed.
2) Contract modifying for 18 months for $55 per month to be made. The entry shall be:
July 1st Customer Account Debit $990
To, Unearned Revenue Credit $990