Question

Campus Cellular provides cell phones and 1 year of cell service to students for an upfront, non-refundable fee of \(300 and a usage fee of \)5 per month. Students may renew the service for each year they are on campus (on average, students renew their service one time). What amount of revenue should Campus Cellular recognize in the first year of the contract?

Short answer

Campus Cellular acknowledges revenue of $210.

Step-by-step solution

Meaning of Revenue Recognition

GAAP guidelines help define different revenues for different situations, this process is known asrevenue recognition. When a significant event occurs, revenue is typically documented, and monetary amounts for the company are easily measured.

Amount of revenue should be recognized

Thetotal cost of the transaction is $420. In that instance, Campus Cellular is offering a service without charging a price in the second year. As a result, the upfront price should be recorded twice as revenue. As a result, in both year 1 and year 2, Campus Cellular acknowledges revenue of $210.

Working notes:

Non-refundable fee = $300

Usage fee = $5 per month

$\begin{array}{rcl}\mathrm{Total}\mathrm{cost}\mathrm{of}\mathrm{transaction}& =& \mathrm{Nonrefundable}\mathrm{fee}+\left(\mathrm{Usage}\mathrm{fee}\times 24\mathrm{months}\right)\\ & =& \$300+\left(\$5\times 24\right)\\ & =& \$300+\$120\\ & =& \$420\\ & & \\ \mathrm{Revenue}\mathrm{recognized}\mathrm{in}\mathrm{first}\mathrm{year}& =& \frac{\mathrm{Total}\mathrm{cost}\mathrm{of}\mathrm{transaction}}{2}\\ & =& \frac{\$420}{2}\\ & =& \$210\end{array}$