MEMORANDUM
To: Dr. John J. Morris, Department of Accounting
From: Group # 5 (Amanda Picht, Qinxi Fan, Mengnan Zhang)
Date: April 10, 2012
Subject: Acctg 642: Case 09-1, Velocity Cellular
Statement of Facts
Velocity Cellular Services is a company that sells wireless services and products based on the Global System for Mobile Communications (GSM) standard. Under the GSM standard, an activation card is necessary for every subscriber. The company is promoting Power Starterpack, a prepaid phone service plan to existing wireless subscribers. Each subscriber of this plan will get a new activation card and a nonrefundable prepaid fee of $200. The $200 prepaid voucher
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The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s). II. Subparagraph superseded by Accounting Standards Update No. 2009-13. III. If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor. C. ASC 605-25-55-1 depicts a flow chart; it graphically summarizes ASC 605-25-25-5, and states that an item qualifies as a multiple deliverable arrangement if a right of return exists or is not applicable.
2. Velocity Cellular should allocate the $200 nonrefundable fee between the activation card and the airtime card (prepaid voucher). The activation card should be recognized as revenue at the point of purchase, while the airtime minutes should be recognized at their point of use (as revenue is earned). A. ASC 605-25-30-2 states that an arrangement consideration shall be allocated at the inception of the arrangement to all deliverables on the basis of their relative selling price (the relative
605-25-25-3, Revenue Recognition-Multiple Element Arrangements-Recognition; separated contract with the same entity, near or at the same time are considerate as a package.
iv. Arrangement considerations must be fixed or determinable and are to be allocated at the “inception of the arrangement to all deliverables on the basis of their relative selling price.”
Market shall not exceed the net realizable value b. Market shall not be less than net realizable value reduced by an allowance for an approximately normal profit margin. Net Realizable Value Estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
Also the deliverables in this case do meet the general separation criteria under FASB ASC 605-25-25-5. This is because the software does have a standalone value to the customer, and there is an objective and reliable evidence of fair market value for the installation, and there is no reference or evidence that a general right of return granted by the supplier. Therefore we can consider the units in this arrangements as separate entities and use the relative selling price method to account for them.
Conditions that must be met for a transfer of receivables to be accounted for a sale are as follows:
Part three explains that as the result of the consumer accepting the vehicle as is, the consumer waives all right to return the vehicle to the premise if the consumer finds out that the vehicle looks or feels different than originally sought.
To determine these agreements should be accounted for separately or as a single arrangement, we would consider in ASC 605-25 Revenue Recognition to Multiple-elements agreements
Revenue Recognition – since Telco’s main source of revenue is from access and usage of network, it is important to understand how this revenue is recognized and earned. Verizon bills its access revenue in advance and is recognized when the revenue is earned. The usage revenue is billed exactly the opposite, in arrears. This revenue is recognized when services are rendered. When handsets are delivered to a customer, as well as additional equipment revenue, is when the revenue from these transactions is realized (Verizon notes, 2014).
In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.
According to Article 35(2) (c), except the parties have agreed otherwise, the delivered goods must possess the qualities of goods which the seller has held out to the buyer as a sample or model. But, the seller still has liability to delivered goods as sample or model, even the buyer held out sample or model, if the parties agreed that the goods shall conform to such sample or model.
Subsection (c) regarding the definition of “unrealized receivables”; Section 751(c) defined the unrealized receivable as any rights to payment for goods delivered, or to be delivered, to the extent that their proceeds would be treated as amounts received from the sale or exchange of property other than a capital asset, or services rendered, or to be rendered.
Step 5: Recognize revenue when (or as) the performance obligations are satisfied (i.e. when (or as) control of good or service is transferred to customer.” (Streaser, Jialin Sun, Perez Zaldivar, & Ran, 2014).
As part of the Sprint prepaid brands, Virgin Mobile USA is a mobile phone service that offers Android-powered smartphones and pre-paid web access phone service. Virgin Mobile-branded phones are widely available in over 40,000 stores nationwide, including Target, Walmart, Best Buy and Radioshack. Virgin Mobile USA’s service is based on a non-contract basis, offering a freedom of service to their customers compared to other major-brand mobile phone service (Business Wire, 2012).
II) The delivery method in the contract is not specific and may cause confusion. To improve this contract, it needs to include detailed method of delivery.
Imagine a world without cellphones. Can you think of yourself without one? As the clock ticks with Information Technology, we cannot help but run along the fast lane of the 21st century. Like a car, this development is being fueled by communication: Internet, text messaging, electronic-mails – all bundled up in one gadget, the cellphone. It is needless to say then that cellphones or mobile phones are now the roads of communication. How technology has prospered the human species, giving us with so much liberty, carries a price tag we all have to pay – Responsibility. Mobile network operators embody this responsibility in the form of a contract. Once this contract is breached, the high amount of early termination fee will be the painful