Question

Tablet Tailors 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. Tablet 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 \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet 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 \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(b) Prepare any journal entries to record the revenue arrangement for Tablet Bundle B on July 1, 2017, and December 31, 2017.

Short answer

Total revenue is $1,20,000.

Step-by-step solution

Meaning of Unearned Service Revenue

The term unearned service revenue defines the cumulative amount of revenue received in advance from a customer, which a company reports on the liability side of the balance sheet.

Journal entries for tablet bundle B

Date	Particular	Debit ($)	Credit ($)
July 1, 2017	Cash a/c	1,20,000
	Unearned service revenue a/c (internet)		51,429
	Unearned service revenue a/c (maintenance)		25,714
	Sales revenue a/c		42,857
	Cost of goods sold a/c	35,000
	Inventory a/c		35,000
December 31, 2017	Unearned revenue a/c (internet)	8,571.43
	Unearned revenue a/c (maintenance)	4,285.71
	Service revenue a/c		12,857.14

Working Notes:

$\begin{array}{rcl}\mathrm{Total}\mathrm{revenue}& =& \mathrm{Number}\mathrm{of}\mathrm{contracts}\times \mathrm{Price}\\ & =& 200\times \$600\\ & =& \$120,000\\ \mathrm{Cost}\mathrm{of}\mathrm{goods}\mathrm{sold}& =& \mathrm{Number}\mathrm{of}\mathrm{contract}\times \mathrm{Cost}\\ & =& 200\times \$175\\ & =& \$35,000\\ \mathrm{Total}\mathrm{standalone}\mathrm{price}& =& \mathrm{Standalone}\mathrm{price}\mathrm{of}\mathrm{tablet}+\mathrm{Standalone}\mathrm{price}\mathrm{of}\mathrm{tablet}\mathrm{service}\mathrm{plan}+\mathrm{Standalone}\mathrm{price}\mathrm{for}\mathrm{connection}\\ & =& \$250+\$150+\$300\\ & =& \$700\\ \mathrm{Revenue}\mathrm{allocation}\mathrm{to}\mathrm{tablet}& =& \frac{\mathrm{Standalone}\mathrm{selling}\mathrm{price}}{\mathrm{Total}\mathrm{standalone}\mathrm{price}}\times \mathrm{Price}\mathrm{for}\mathrm{tablet}\mathrm{and}\mathrm{internet}\mathrm{connection}\\ & =& \frac{\$250}{\$700}\times \$600\\ & =& \$214\\ \mathrm{Revenue}\mathrm{allocation}\mathrm{to}\mathrm{connection}& =& \frac{\mathrm{Standalone}\mathrm{selling}\mathrm{price}}{\mathrm{Total}\mathrm{standalone}\mathrm{price}}\times \mathrm{Price}\mathrm{for}\mathrm{tablet}\mathrm{and}\mathrm{internet}\mathrm{connection}\\ & =& \frac{\$300}{\$700}\times \$600\\ & =& \$257\\ \mathrm{Revenue}\mathrm{allocation}\mathrm{to}\mathrm{tablet}\mathrm{service}\mathrm{plan}& =& \frac{\mathrm{Standalone}\mathrm{selling}\mathrm{price}}{\mathrm{Total}\mathrm{standalone}\mathrm{price}}\times \mathrm{Price}\mathrm{for}\mathrm{tablet}\mathrm{and}\mathrm{internet}\mathrm{connection}\\ & =& \frac{\$150}{\$700}\times \$600\\ & =& \$129\end{array}$