Case C: Cellular Telephone Contract

XTel runs a promotion in which new customers who sign a two-year contract receive a free phone. There is a one-time activation fee of $50 and a monthly fee of $40 for the ongoing service. The same monthly fee is charged by XTel regardless of whether the free phone is provided. Each phone costs XTel $100. XTel frequently sells the phone separately for $120. XTel is not required to refund any portion of the fee paid for any reason. XTel is a sufficiently capitalized, experienced and profitable business. There is no reason to believe the two years of service will not be provided.

1.How should XTel account for this transaction?