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15 April, 15:14

Sky Communications (SKY) usually sells a cell phone for $448 plus 12 months of cellular service for $672. SKY has a special, time-limited offer in which it gives the phone for free and sells the 12 months of cellular service for $560. Each phone costs SKY $280, which it accounts for in its perpetual inventory system. On July 1, SKY sells one of the special packages, delivers the phone, collects the $560 cash, and starts the cellular service.

What journal entries would SKY record on July 1 and July 31?

a. Record receipt of cash.

b. Record the sales of cellular service for 12 months.

c. Record the cost of goods sold.

d. Record the deferred revenue.

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  1. 15 April, 15:51
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    The Journal Entry from July 1 and July 31 is shown below:-

    1. Cash Dr, $560

    To Deferred revenue $560

    (Being cash is received)

    2. Deferred revenue $336

    To Sales revenue $336

    (Being 12 months sales service is recorded)

    3. Cost of goods sold $280

    To Inventory $280

    (Being cost of goods sold is recorded)

    4. Deferred revenue ($336 : 12) $28

    To Service revenue $28

    (Being Deferred service revenue is recorded)

    Working Note:-

    Cellular service revenue = offer price : total cost of phone and service * cellular service

    = (($560 : ($448 + $672)) * $672

    = $336
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