With our understanding of revenue recognition lets see how we might apply the 5 step model...

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Accounting

With our understanding of revenue recognition lets see how wemight apply the 5 step model to the following transaction that mostof us have encountered. Lets say we visit our favorite phone storeand sign up for new cell service. We sign up for and receive a newphone that would normally retail for $500 (cost to manufacture$380). We commit to a three year contract where we will have to payback an amount that starts at $600 (to pay for the phone) but dropseach month until it reaches zero at the end of 3 years (kind oflike financing for the phone). We pay an activation fee of $35along with the first month of service that will be $70 each monthfor the next 36 months. After one year of service, we will beeligible for $100 off the latest phone if we trade in the one yearold phone for a new one. That rises to $200 after two years. Youcan describe how to apply the 5 step model to this transaction fromthe phone company side. Show journal entries when necessary to makesure this gets recorded (you do not have to show all of them justenough to get the idea).

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1 Five step model revenue recognition Cost price of Cell phone 380 Normal selling pricecash 500 Profit on sale of Cell Phone 120500380 But Instalment price 600 So Financial charge 100600500 First step revenue recognition is at the time of delivery of Cell phone is Normal selling price 500 Second step of See Answer

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