Question

Problem 18-02

Teal 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.

Problem 18-02 Teal 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. Teal 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 $520. The standalone selling price of the tablet is $238 (the cost to Teal Company is $170). Teal Company sells the Internet access service independently for an upfront payment of $328. On January 2, 2020, Teal Company signed 90 contracts, receiving a total of $46,800 in cash. Teal 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 $624. Teal Company provides the 3-year tablet service plan as a separate product with a standalone selling price of $157. Teal Company signed 210 contracts for Teal Bundle B on July 1, 2020, receiving a total of $131,040 in cash. 2. In response to competitive pressure for Internet access for Teal Bundle A, after 2 years of the 3-year contract, Teal 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 $94 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. 50 Teal Bundle A customers sign up for this offer. Prepare the journal entry when the contract is signed on January 2, 2022, for the 50 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 o for the amounts.) Account Titles and Explanation Debit Credit Prepare the journal entry on December 31, 2022, for the 50 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 o for the amounts. Round answers to 0 decimal places, e.g. 5,125.) Account Titles and Explanation Debit Credit

Answer 1

Answer: As per IFRS 15 - Contract modification should be accounted for prospectively if the additional promised goods or services are distinct and the pricing for those goods or services reflects their standalone selling price.

In the given case, even though the remaining services to be provided are distinct, the modification should not be accounted for as separate contract.

The modification would be accounted for, from the date of modification, as if the existing arrangement was terminated and a new contract (i.e. on prospective basis) because the remaining services to be provided are distinct.

At the end of 2nd year - Teal Bundle A will post below entry for 50 new contracts (Existing price of 520 + 94 for additional revised service package) comes out - 50* 614 = 30700

Entry - Party A/c......Dr $30700

To Sale of services $ 30700