Barrios Communications is a provider of satellite television services. It will i

Question

Barrios Communications is a provider of satellite television services. It will install a satellite dish free of charge for any customer that agrees to a one-year service contract at a price of $50 per month. Installation costs Barrios $150. Customers typically remain with Barrios for much longer than the one year required, an average of 10 years (i.e., 9 years beyond their contractual obligation).

Barrios enters into a contract under the terms described above on January 1, 2019.

Required:

1. What amount of revenue should Barrios record related to the contract in 2019?

2. What amount of expense related to the contract should Barrios record related to the contract in 2019?

Explanation / Answer

Revenue related to Contract in 2019:- ( Assuming upto 31st December'2019)

Revenue should be recognised in case of transaction involving rendering of services only when-

1. The amount of Revenue can be measured reliably.

2. It is probable that economic benefits will flow to the entity.

3. The stage of completion can be measured reliably.

4. Cost incurred for the transaction and total cost can be measured reliably.

Therefore,

Revenue for 2019 ( December'2019) = $ 50 per month * 12 months

= $ 600

Amount of Expense related to Contract to be recorded in Decmeber'2019-

Since in this case Installation cost is incurred for a contract period of 1 Year, the cost shall be amortized over the period of 1 year. It must be noted that initial period of the contract is for 1 year and customer may or may not chose to avail in next year the services.

Cost to be recorded in 2019= $ 150

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