Question

Computers Inc. sells personal computers as well as home Internet service. On July 1, 2019, Computers sold a computer with a two-year Internet connection service contract. The customer paid $1,950 cash for this special offer. Each component could have been purchased separately by the customer so three performance obligations have been identified.

The stand-alone selling price of the computer is $900 (cost to Computers Inc. $490). The stand-alone value of the two-year Internet service is $1,200 if purchased and paid for today.

Assume the costs to provide the Internet are incurred fairly evenly throughout the two-year period. The customer takes the computer home on July 1, 2019.

Computers Inc. has a December 31 year end and prepares financial statements annually.

Required:

1. How much of the $1950 revenue will be recorded in each year (2019 through to 2021)? Show all calculations and label all amounts. (Round to the nearest dollar.)

(b)    Prepare all of the journal entries to record the above transaction for 2019 and 2020.

Answer 1

Revenue recognition occurs when an entity satisfies a performance obligation by transferring either goods or a service to a customer. Revenue should be recognized at an amount that reflects the expected consideration the entity is entitled to receive in exchange for the goods or services provided.

In order to properly apply revenue recognition standard, entity should apply 5 step approach model.

Step 1 : Identify the contract with the customer

Step 2 : Identify the separate performance obligations in the contract

Step 3 : Determine the transaction price

Step 4 : Allocate the transaction price to the separate performance obligations

Step 5 : Recognize revenue when or as the entity satisfies each performace obligations.

this problem is related to only step 4 & 5, allocation of price to the separate performance obligations , and revenue recognition.

Entity have identified three performance obligations - One sale of computer, two yearly internet service.

Transaction price should be allocated to each seprate performance obligations based on the amount of consideration that would be expected for satisfying each unique obligation. The standalone selling price of each performance obligations is provided. The total consideration should be allocated in the proportion to the stand-alone selling prices.

Goods/ Services	Stand-alone price	Allocated price
1 Computer sales	900	836	[900 / 2100] * 1950
2 yr Internet Service	1,200	1,114	[1200 / 2100] * 1950
Total	2,100	1,950

Sales of computer performance obligations satisfied at a point in time i.e.On July 1, 2019, Internet service performance obligations will be satisfied over time i.e from July 1, 2019 to June 30, 2021, evenly throughout the two-year period.

Sales of computer revenue will be recored on July 1, 2019 - $ 836 (full in year 2019)

Internet service revenue will be recored from Jul 1, 2019 to Dec 31,2019 for six months in year 2019 - $ 279 (rounded), Internet service reveue will be recored from Jan 1, 2020 to Dec 31,2020 for 12 months in year 2020 and balance Internet service revenue will be recored from Jan 1, 2021 to June 30, 2021 for six months in year 2021

Revenue	Y 2019	Y 2020	Y 2021	Total
Computer sales	836			836
Internet service	279	557	278	1,114
Total	1,115	557	278	1,950

(b)    Prepare all of the journal entries to record the above transaction for 2019 and 2020.

Date	Account	Debit	Credit
01-Jul-19	Cash	1,950
01-Jul-19	Sales of Computer		836
01-Jul-19	Unearned revenue		1,114
01-Jul-19	Cost of Goods Sold	490
01-Jul-19	Inventory		490
31-Dec-19	Unearned revenue	279
31-Dec-19	Internet Service revenue		279
31-Dec-20	Unearned revenue	557
31-Dec-20	Internet Service revenue		557
30-Jun-21	Unearned revenue	278
30-Jun-21	Internet Service revenue		278