Reference no: EM13841541

ACCOUNTING THEORY

Word Limit: 1300 words.

CASE ET PHONE HOME

Easy Telecommunications Ltd (ET) developed a two-year prepaid telephone plan in order to target families with older children. The two-year prepaid plan, which is called ET Phone Home, combines a land-line (i.e., a fixed-line) telephone service with a mobile telephone service. For a fixed, nonrefundable price of $790 customers receive the following:

Features of ET

Phone- Home Information pertaining to the value of each feature

Installation and activation of land-line connection This is necessary so that the land-line phone can work at the customer's place of residence.

ET charges a fee of $190 for this service to casual customers (those not on a 2-year plan) and to customers who relocate.

Land-line handset (fixed-line) This is a telephone that is not mobile. ET sells land-line handsets for $110 each. Used ET handsets sell on E-Bay for approximately $55.

Mobile phone handset The model of mobile phone included in ET Phone Home is sold separately for $40.

Prepaid mobile phone service: 2,000 minutes, expires after 2 years This can be recharged for a further 1,000 minutes over a period of one year for $200.

600 minutes of free mobile-phone-tofamily-land-line calls; expires after 2 years Available with ET Phone Home only; the mobile phone account may be recharged for 300 minutes of mobilephone-to-family-land-line calls for one year for $60.

Additional mobile phones Additional mobile phones can be added to the plan for $490, including 2,000 minutes of prepaid mobile calls and 600 minutes of free mobile-phone-to-family-land-line calls, expiring after 2 years.

• The consideration of $790 is paid by the customer at the commencement of the ET Phone Home contract. At this time the mobile phone and land-line handsets are delivered to the customer.

• Installation and activation of the land-line connection will normally take place within two weeks of the commencement of the contract.
ET is ready to launch ET Phone Home and management has requested a report on its financial reporting implications. The marketing manager has suggested that all of the $790 should be recognised as revenue when ET enters into a contract with a customer. She claims this is valid because the $790 payment is not refundable.

Other information

• Assume all amounts referred to in the case data are material to ET's financial statements.

• ET plans to adopt AASB 15 in the preparation of its next set of financial statements if its application is consistent with the Conceptual Framework.

• You are not required to consider the accounting treatment for any expenses arising from the ET Phone Home contracts for this assignment.

Required [weighting of each question is shown as %]

a) Describe the key accounting issue(s) arising from the ET Phone Home contract.

b) Describe two principles from the Conceptual Framework that are relevant to this case.

c) In this part you are required to propose a policy to account for the proceeds from entering into ET Phone Home contracts with customers. Your policy should be different form the marketing manager's policy. Your policy should be consistent with AASB 15. You do not need to consider the disclosure component of the policy. (up to 600 words)

In your response:

i) clearly describe your policy ii) explain how it complied with AASB 15 by going through steps 2 to 5 of the approach adopted in that Standard.

d) Based on the two principles identified in part b), evaluate (up to 300 words) [30%]:

i) the accounting policy proposed by the marketing manager's

ii) the policy that you proposed in part c) i)

e) 1/4/2015 ET entered into an ET Phone Home contract. ET received $790 and the mobile and land-line handsets were delivered to the customer.

Analyse the effect of applying your accounting policy (per part c) to account for the ET Phone Home contract on the elements of ET's financial statements (i.e., effects on assets, liabilities, income etc.) at 30 June 2015. Show workings. (It may be useful to present your answer as a transaction analysis, as shown in lectures - refer topic 3). (up to 20 words).