Reference no: EM132740093

Landline Corporation is a public company with a calendar year-end. Landline provides a wide variety of telecommunications services to a number of different customer groups, including routing calls to one of several providers of psychic services with whom Landline has contracts. In October 20X9, a new psychic service provider, Psychics 'R' Us (PRU), enters into an agreement with Landline, and Landline adds PRU to its providers of psychic services.

• When a customer calls a particular ''1-900'' number, (1) Landline is responsible for routing the call to PRU's offices or to those of another psychic service provider, depending on the availability of psychics to take the call, and (2) if one of PRU's psychics answers the call, he or she provides psychic advice to the customer.
• The arrangement between Landline and PRU calls for Landline to bill the customer $5 per minute spent using PRU's ''1-900'' number. This per-minute charge is set by Landline and is consistent with the amount charged per minute for advice from non-PRU psychics. The charge on the customer's bill notes the source of the billing as ''Psychics 'R' Us.'' Landline is responsible for remitting $4 per minute to PRU. If a customer does not pay the $5 per minute, Landline is still responsible for paying PRU the $4 net amount per minute for that customer's usage of the ''1-900'' number.
• All marketing for the psychic services is performed and paid for by PRU. Landline is not mentioned in PRU's marketing campaign. When the customer calls the ''1-900'' number and that call is routed to PRU's offices, the psychic that answers identifies himself or herself as ''a psychic with Psychics 'R' Us.''

Requirements

Question 1: What are the accounting issue(s) and the relevant components of the authoritative literature? Assume, for purposes of interpreting the Codification, that Landline is the ''entity.''

Question 2: Should Landline recognize revenue gross (i.e., as a principal) for the amount billed to the customer for their time spent using the ''1-900'' number, or net (i.e., as an agent) for the net amount retained by Landline?

Question 3: What journal entries are necessary to appropriately account for each minute a customer spends using PRU's ''1-900'' number?