direct tv spends $500,000 in total evenly over the current year (i.e., the same

Question

direct tv spends $500,000 in total evenly over the current year (i.e., the same amount every month) on local advertising in a given area to attract new customers. New customers must pay an installation and hookup fee of $60. After hook-up, customers get a cable box and access to the cable network. direct tv collected $100,000 in hookup fees at the beginning of every month over Year 1. The average length of a customer relationship is 24 months. Total administrative and maintenance costs on the existing network in the area totaled $5 million, incurred evenly throughout the year. The CEO wants to recognize the hookup fees as revenue when collected. His view is the hookup is a separate service that culminates in the provision of a cable box and access to the network. The CFO disagrees with this view. She thinks the customer is ultimately paying for the enjoyment of cable service and that happens over the life of the customer relationship as cable service is provided.

Provide the journal entries related to the hook-up fee for the first three months in Year 1 under the CEO’s and cfo's approach. For simplicity, ignore all journal entries related to costs – just focus on revenue.

Explanation / Answer

Under CEO’s approach For January Cash $100,000 Hook-up fee revenue $100,000 (To record receipt of Hook-up fee revenue for the month January) For February Cash $100,000 Hook-up fee revenue $100,000 (To record receipt of Hook-up fee revenue for the month February) For March Cash $100,000 Hook-up fee revenue $100,000 (To record receipt of Hook-up fee revenue for the month March) Under CFO’s approach For January Cash $100,000 Hook-up fee revenue $4,167 Unearned Hook-up revenue $95,833 (To record receipt of Hook-up fee revenue for the month January) For February Cash $100,000 Hook-up fee revenue $4,167 Unearned Hook-up revenue $95,833 (To record receipt of Hook-up fee revenue for the month February) Unearned Hook-up service revenue $4,167 Hook-up fee revenue $4,167 (To record transfer revenue earned from January customers) For March Cash $100,000 Hook-up fee revenue $4,167 Unearned Hook-up revenue $95,833 (To record receipt of Hook-up fee revenue for the month March) Unearned Hook-up service revenue $8,333 Hook-up fee revenue $8,333 (To record transfer revenue earned from January and February customers)

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