Question

Wildhorse Company sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1.		Wildhorse Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is $483. The standalone selling price of the tablet is $263 (the cost to Wildhorse Company is $166). Wildhorse Company sells the Internet access service independently for an upfront payment of $274. On January 2, 2020, Wildhorse Company signed 90 contracts, receiving a total of $43,470 in cash.
2.		Wildhorse Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for $589. Wildhorse Company provides the 3-year tablet service plan as a separate product with a standalone selling price of $139. Wildhorse Company signed 180 contracts for Wildhorse Bundle B on July 1, 2020, receiving a total of $106,020 in cash.

In response to competitive pressure for Internet access for Wildhorse Bundle A, after 2 years of the 3-year contract, Wildhorse Company 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 $96 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. 30 Wildhorse Bundle A customers sign up for this offer.

Prepare the journal entry when the contract is signed on January 2, 2022, for the 30 extended contracts. Assume the modification does not result in a separate performance obligation. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

Prepare the journal entry on December 31, 2022, for the 30 extended contracts (the first year of the revised 3-year contract). (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,125.)

Account Titles and Explanation	Debit	Credit

Answer 1

Date	Account	Debit	Credit
01-02-2022	Cash (30 * $96)	$2,880
	Unearned Service Revenue		$2,880
12-31-2022	Unearned Service Revenue	$1,780
	Service Revenue ($5,340 / 3)		$1,780

Working note: Calculation of total unearned revenue

Original Internet Service Contract (30 * $246)	$7,380
Revenue recognized in first 2 years ($7,380 * 2/3)	-$4,920
Remaining Service at original rates	$2,460
Extended service	$2,880
Total Unearned Revenue (3 years service)	$5,340

Cost of one original service contract = [$274 / ($274 + $263)] * $483 = $246