iphone upgrade

question 10

10. Apple assumes the estimated value of returned iPhones are equal to the remaining balance of the customer's loan (e.g. after one year, the value of the phone is / of $639 or $319.5). Referring to Exhibit 6, describe and justify the complex journal entries of sale of a phone under the new "Upgrade Program" at the time of sale and subsequently, when a customer exercise the right to return? Make sure you label each account correctly (e.g. cash(+A)) and check balance sheet will remain balanced after these journal entries. How does Total Assets, Total Liabilities, and Net Income immediately change after each sale and subsequently when the customer returns an iPhone? What underlying assumptions apple have made for these entries? 11. Now assume Apple expects that customers will return the phone after 1.5 years. Update journal entries in Exhibit 6 with this new assumption. How would gross profit change relative to that with the Apple underlying assumption in Exhibit 6? Exhibit 6 Illustration of the iPhone Accounting under the New Upgrade Program ($) Assume that Apple sold the iPhone 6s for $649 (without AppleCare+) and that Apple allocated $10 of revenue to the software deliverable. The software deliverable is excluded from the illustration below, reducing the revenue for the iPhone 6s to $639. After excluding the software deliverable, assume that the gross profit was $192 (30%). Apple assumed that the consumer exercised the trade in option after one year and that the market value of the returned phone was not lower than the book value of the returned phone at the point in time Apple purchased it back from the customer. The accounting for the iPhone sale under the upgrade program would be as follows: Q1 (iPhone was sold to consumer): Dr. Cash 639 D Cr. Revenue Cr. Guarantee liability for trade-in option 319.5 319.5 Dr. Cost of Goods Sold Dr. Right of Return Asset 223.5 223.5 447 Cr. Inventory After one year (exercise of trade-in option): 319.5 Dr. Guarantee liability for trade-in option Cr. Cash 319.5 223.5 Dr. Inventory 223.5 Cr. Right of Return Asset Source: Casewriter Note: "Dr" means "debt" and "C" means eredit." 10. Apple assumes the estimated value of returned iPhones are equal to the remaining balance of the customer's loan (e.g. after one year, the value of the phone is / of $639 or $319.5). Referring to Exhibit 6, describe and justify the complex journal entries of sale of a phone under the new "Upgrade Program" at the time of sale and subsequently, when a customer exercise the right to return? Make sure you label each account correctly (e.g. cash(+A)) and check balance sheet will remain balanced after these journal entries. How does Total Assets, Total Liabilities, and Net Income immediately change after each sale and subsequently when the customer returns an iPhone? What underlying assumptions apple have made for these entries? 11. Now assume Apple expects that customers will return the phone after 1.5 years. Update journal entries in Exhibit 6 with this new assumption. How would gross profit change relative to that with the Apple underlying assumption in Exhibit 6? Exhibit 6 Illustration of the iPhone Accounting under the New Upgrade Program ($) Assume that Apple sold the iPhone 6s for $649 (without AppleCare+) and that Apple allocated $10 of revenue to the software deliverable. The software deliverable is excluded from the illustration below, reducing the revenue for the iPhone 6s to $639. After excluding the software deliverable, assume that the gross profit was $192 (30%). Apple assumed that the consumer exercised the trade in option after one year and that the market value of the returned phone was not lower than the book value of the returned phone at the point in time Apple purchased it back from the customer. The accounting for the iPhone sale under the upgrade program would be as follows: Q1 (iPhone was sold to consumer): Dr. Cash 639 D Cr. Revenue Cr. Guarantee liability for trade-in option 319.5 319.5 Dr. Cost of Goods Sold Dr. Right of Return Asset 223.5 223.5 447 Cr. Inventory After one year (exercise of trade-in option): 319.5 Dr. Guarantee liability for trade-in option Cr. Cash 319.5 223.5 Dr. Inventory 223.5 Cr. Right of Return Asset Source: Casewriter Note: "Dr" means "debt" and "C" means eredit