1.Provide the journal entries for Apple to sell a single iPhone for $800 under both subscription and upfront recognition methods. Include journal entries to record your estimate of cost of goods sold.

2. Based on the $800 sales price, compare how the two methods would impact Apple's income statements, balance sheets, and cash flows statements for the current and future years. Apple uses subscription accounting, as opposed to the upfront recognition method.

3. Which method, in your opinion, better reflects the economics of the iPhone?

4. Which method presents smoother earnings - subscription accounting or upfront recognition?

5. Can you develop another method that would be more appropriate than either subscription or upfront recognition?

6. Show how the difference between the accounting methods would impact the company's financial statement ratios.

iPhone Revenue Recognition Software-enabled hardware devices (also known as "bundled components"), such as Apple's iPhone, Macs, and iPods, fell under the software revenue recognition rules pursuant to American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition. When Apple first introduced the iPhone in 2007, the company announced it would use the "subscription method of accounting" under SOP No. 97-2 to book revenue for its new iPhone. Oppenheimer explained: Since we will be periodically providing new software features to iPhone customers free of charge, we will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight line basis over 24 months. So while the cash from iPhone sales will be collected at the time of sale, we will be recording deferred revenue and costs of goods sold on our balance sheet, and amortizing both of them into our earnings on a straight line basis over 24 months. We will continue to expense our iPhone engineering, sales, and marketing costs as we incur them. This accounting policy will have no impact on cash flow or the economics of our business. 12 In contrast, Apple generally recognized revenue and cost of sales for its other software-enabled hardware products such as Macs and iPods at the time of sale (i.e., immediate revenue recognition) under SOP No. 97-2. This was because the company did not provide new features or software applications for those products free of charge. (See Exhibit 2 for the FY 2008 financial statement note relating to Apple's revenue recognition policies under GAAP.) Apple's decision to use subscription accounting for the iPhone came soon after the company faced consumer backlash over a $5 upgrade fee (later reduced to $1.99 ) it charged new MacBook buyers. 13 In 2006, Apple sold its latest MacBook with a wireless chip that would allow users to access the new and better Wi-Fi 802.11n technology once it became available and the chip was activated with