Tablet service plan modification

 Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

  •  1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-yearis $500. The standalone selling price of the tablet is $250 (the cost to Tablet Tailors is $175). Tablet Tailors sells the Internet access service independently for an upfront payment of $300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of $50,000 in cash.
  •  2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for $600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of $150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of $120,000 in cash.

Refer to the Tablet Bundle A revenue arrangement. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

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(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

(b) Prepare the journal entries on December 31, 2019, for the 40 extended contracts (the first year of the revised 3-year contract).

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