Velocity Cellular sells wireless services and products based on the Global System for Mobil Communications Standard. GSM requires subscribers to have an activation card to have access to the network. The activation card identifies the person, provides a new phone number and only works with specific network carriers.
The company is planning to promote a prepaid phone service plan called “Power Starterpack” to existing wireless subscribers. The plan includes a new activation card and a prepaid voucher. Each Subscriber will be required to have this activation card to access the network. The price of the plan is a nonrefundable fee of $200 which includes a voucher for airtime minutes valued at $50.00. The voucher must be used within 360 days or the remaining value is forfeited. If there is no activity for seven consecutive months, the subscriber’s account is closed and the phone number is deactivated. No refunds are given and the subscriber has no general rights of return for the “Power Starterpack”. The new card gives the subscriber additional features not available with the old activation card. The added functionalities on the new card consist of Bluetooth technology, international calling and additional memory. When a “Power Starterpack” is purchased, subscribers must return the old activation card to the company and install the new activation card in their existing cellular phones. Old cards can also be replaced to subscribers if they were lost; malfunctions or new functionalities are needed on the subscriber existing cellular phone. New activation cards can be purchased on a standalone basis from Velocity or other independent wireless phone retailers.
Required: Refer to relevant accounting guidance to determine and support the appropriate method for recognizing revenue for the Power Starterpack.
According EITF No. 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet the criteria below:
• The delivered item(s) has value to the customer on a standalone basis. The item(s) has value on a standalone basis if it is sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis.
• There is objective and reliable evidence of the fair value of the undelivered item(s)
• If the arrangement includes a general right or return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor.
In evaluating the multiple deliverables in the Power Starterpack, the new activation card met the first condition of EITF Issue No. 00-21 because this item has value to the customer on a standalone basis and it can be purchased directly from Velocity or other independent wireless phone retailers. The prepaid voucher met the second condition because it has a reliable evidence…