On January 1, 2017, Loud Company enters into a 2-year contract with a customer for an unlimited talk and 5 GB data wireless plan for $65 per month. The contract includes a smartphone for which the customer pays $299. Loud also sells the smartphone and monthly service plan separately, charging $649 for the smartphone and $65 for the monthly service for the unlimited talk and 5 GB data wireless plan. On July 1, 2017, the customer realizes that she needs less data in her wireless plan and downgrades to the unlimited talk and 2 GB data plan for the remaining term of the contract (18 months). The unlimited talk and 2 GB data plan is priced at $55 per month. The $55 per month is Loud's current stand-alone price for this plan that is available to all customers.

Required:

1. How should Loud account for this contract modification?

2. Provide Loud's new monthly revenue recognition journal entry.

CHART OF ACCOUNTS

Loud Company

General Ledger

ASSETS

111 Cash

121 Contract Receivable

141 Inventory

152 Prepaid Insurance

181 Equipment

198 Accumulated Depreciation

LIABILITIES

211 Accounts Payable

231 Salaries Payable

250 Unearned Revenue

261 Income Taxes Payable

EQUITY

311 Common Stock

331 Retained Earnings

REVENUE

411 Sales Revenue

EXPENSES

500 Cost of Goods Sold

511 Insurance Expense

512 Utilities Expense

521 Salaries Expense

532 Bad Debt Expense

540 Interest Expense

541 Depreciation Expense

559 Miscellaneous Expenses

910 Income Tax Expense

Analysis

How should Loud account for this contract modification?

Additional Instruction

The contract modification ____ add goods or services to the arrangement; therefore, this modification ______ be treated as a separate contract. However, to determine the appropriate accounting for the modification, the entity has to assess whether the remaining goods and services (18 months of service) are _____ the goods and services already provided to the customer (handset and 6 months of services).

On July 1, the contract receivable has a remaining balance of ________.As a result, the entity has _______ to allocate to the remaining 18 months of service, or ______ per month.