MovieNet Ltd is listed on the ASX and offers streaming network services to customers. The company

uses distributors to sell its set top boxes and streaming subscriptions to customers. The distributors

either sell only the set top boxes to customers or sell the set top boxes in combination with MovieNet

streaming service contracts. The distributors earn a commission from MovieNet Ltd based on a

percentage of the consideration for each contract entered into. When customers purchase a set top

box from a distributor, they also have the option of signing up to a $12-$month or $24-$month contract

with MovieNet Ltd to access a limited number of streaming services for a fixed fee. Additional

streaming services may be added on a monthly basis for an extra fee. If set top boxes are purchased

alone from distributors, customers are charged the full market price for them. If set top boxes are

purchased together with a service contract, the set top boxes are sold to customers at a discount.

If the customer has any problems with the set top box 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 set top

box at its own cost. In the case of a set top box manufactured by MovieNet Ltd$,$ the distributor will

source the set top box from MovieNet Ltd$,$ which will sell it to the distributor at $50\%$ less than market

price.

MovieNet Ltd has determined that the distributors are acting as their agents in respect of the

subscription contracts but not in respect of the sale of set top boxes.

Additional information

$$ MovieNet Ltd sells its set top boxes to its distributors at $60\%$ of the market price on the

basis that the distributor will use the set top box to entice customers to enter the

contracts with MovieNet Ltd$.$

$$ The commission is $25\%$ for a $12-$month contract.

$$ If the customer enters into a $12-$month contract, the set top box is sold to them for $80\%$

of the quoted market price.

$$ Both MovieNet and the distributor use the perpetual system to recognise inventory sold.

Prices:

Set top box $-$ cost to MovieNet Ltd $$350$

Set top box $-$ market price $$700$

$12-$month contract, price charged to

customers

$$90$ per month, paid in full at the commencement of

the contract.

Required:

$1.$ Discuss the revenue recognition issues that arise out of the transactions described for MovieNet

Ltd for each of the following:

$($a$)$ on the sale of a set top box to the distributor with or without a service contract sold to

customers

$($b$)$ if a customer purchases a set top box from the distributor and enters into a $12-$month

contract with MovieNet Ltd

In each case write any journal entries required to recognise the transactions.

$2.$ Discuss the revenue recognition issues that arise out of the transactions described for the

distributor for each of the following:

$($a$)$ if the distributor sells a set top box to a customer without sign up to any services agreement

with MovieNet Ltd

$($b$)$ if the distributor sells a set top box to a customer and the customer signs up to a $12-$month

service agreement with MovieNet Ltd

In each case write any journal entries required to recognise the transactions.

Ignore discounting.