Question

Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells \(4,000 of prepaid cards in January 2017. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is \)3,000. Indicate how much income Telephone Sellers should recognize in January, February, March, and April.

Short answer

Income in January, February, March, and April are 0, $500, $300, $200 respectively.

Step-by-step solution

Revenue Recognition

The term revenue recognition refers to the conditions in which revenue is acknowledged. Revenue recognition is GAAP’s principle that specifies and accounts for the criteria under which revenue is recognized. When a major event occurs, revenue is frequently recorded, and monetary amount for the organization may be easily determined.

Revenue recognized by Telephone Sellers in January, February, March, and April

None is recognized in January since none is utilized in January that means,

Income in January is $0.

As Telephone Sellers got paid $4,000 and had to pay TeleExpress $3,000, So, the net income is just $1,000

$\begin{array}{rcl}\mathrm{Net}\mathrm{income}& =& \mathrm{Amount}\mathrm{telephone}\mathrm{sellers}\mathrm{get}-\mathrm{Amount}\mathrm{paid}\mathrm{to}\mathrm{TeleExpress}\\ & =& \$4,000-\$3,000\\ & =& \$1,000\end{array}$

Amount paid based on usage in February = 50%

$\begin{array}{rcl}\mathrm{Income}\mathrm{in}\mathrm{February}& =& \mathrm{Net}\mathrm{income}\times \mathrm{Amount}\mathrm{paid}\mathrm{based}\mathrm{on}\mathrm{usage}\mathrm{in}\mathrm{February}\\ & =& \$1,000\times 50\%\\ & =& \$500\end{array}$

Amount paid based on usage in March = 30%

$\begin{array}{rcl}\mathrm{Income}\mathrm{in}\mathrm{March}& =& \mathrm{Net}\mathrm{income}\times \mathrm{Amount}\mathrm{paid}\mathrm{based}\mathrm{on}\mathrm{usage}\mathrm{in}\mathrm{March}\\ & =& \$1,000\times 30\%\\ & =& \$300\end{array}$

Amount paid based on usage in April = 20%

$\begin{array}{rcl}\mathrm{Income}\mathrm{in}\mathrm{April}& =& \mathrm{Net}\mathrm{income}\times \mathrm{Amount}\mathrm{paid}\mathrm{based}\mathrm{on}\mathrm{usage}\mathrm{in}\mathrm{April}\\ & =& \$1,000\times 20\%\\ & =& \$200\end{array}$