Question

Using the 5 – step model of revenue recognition explain when revenue should be recognized for the following situation. Make sure you apply all steps and individual criteria within each step.

5G Telecom is a new company offering 5G data connection. They are the first in Canada and are a publicly traded company on the TSX-V. To attract new customers they are offering a one time bundled 2 year contract for all new subscribers. The following is what they are offering for low price of $100 per month for 2 years.

1. Unlimited data, call and text any where in Canada
2. A new Iphone or Samsung phone
3. A phone protection warranty

5G Telecom will also be offering the above items separately should customers choose not to commit to the plan. The standalone price for each of the above items are as follows:

1. Unlimited data, call and text any where in Canada ($70 per month)
2. A new Iphone or Samsung phone ($1000)
3. A phone protection warranty ($10 /month)

Answer 1

Revenue is recognised in accordance with that core principle by applying a 5-step model:

Step 1: Identify a contract with customer-2 year contract

Step 2: Identify separate performance obligations in the contract (i.e. promise to transfer a distinct good or service to a customer)

(1) Unlimited data, call and text any where in Canada, (2)A new Iphone or Samsung phone and (3) A phone protection warranty

Step 3: Determine the transaction price-$100 per month for 2 years i.e $100 x 24 months =$2,400

Step 4: Allocate the transaction price -The total revenue of $2400 should be allocated to the three performance obligations based on their relative fair values:

Step 5: Recognise revenue when the performance obligation is satisfied