90.2K

Verified Solution

Link Copied!

Telecommunications multiple-element arrangement Network Ltd is a telecommunications company that offers a variety of services to its customers including fixed-line telephone services, mobile phone services and internet services. It uses numerous distributors to sell its mobile phone services. Customers purchase a phone handset from the distributor and at the same time can sign up to a contract with Network Ltd for a period of 12 months or 24 months for the provision of network access for a fixed fee. Calls are charged separately if they exceed a certain limit per month. If the customer enters into a 12- month contract, the handset is sold to them for 40% less than the quoted market price. If the customer enters into a 24-month contract, the handset is sold to them for 50% less than the quoted market price. The distributor earns a commission from Network Ltd based on a percentage of the consideration for each contract entered into 12% for a 12-month contract and 15% for a 24-month contract. Network Ltd sells its handsets to its distributors at 50% less than market price on the basis that the distributor will use the handset to entice customers to enter into the contracts with Network Ltd. If the customer has any problems with the handset during or after the period of the contract (up to a maximum of 2 years), the customer has recourse to the distributor who must replace the handset at its own cost. In the case of a handset manufactured by Network Ltd, the distributor will source the handset from Network Ltd, which will sell it to the distributor at 50% less than market price. The distributor sells handsets to customers even if they do not sign up to any services agreement with Network Ltd. In such cases, the customers are charged the market price for the handsets. The distributor also sells other handsets (i.e. not only those of Network Ltd). Network Ltd has determined that the distributor is acting as its agent in respect of the service contracts but not in respect of its handsets. Additional information

Handset cost to Network Ltd	$200
Handset market price	$320
12-month contract, price charged to customers	$80 per month, all paid upfront
24-month contract, price charged to customers	$60 per month, all paid upfront

Required Discuss the revenue recognition issues that arise out of the transactions described (a) for Network Ltd and (b) for the distributor. Ignore discounting. (LO5)

Answer & Explanation Solved by verified expert

See Answer