To: Dr. John J. Morris, Department of Accounting
From: Group # 5 (Amanda Picht, Qinxi Fan, Mengnan Zhang)
Date: April 10, 2012
Subject: Acctg 642: Case 09-1, Velocity Cellular
Statement of Facts
Velocity Cellular Services is a company that sells wireless services and products based on the Global System for Mobile Communications (GSM) standard. Under the GSM standard, an activation card is necessary for every subscriber. The company is promoting Power Starterpack, a prepaid phone service plan to existing wireless subscribers. Each subscriber of this plan will get a new activation card and a nonrefundable prepaid fee of $200. The $200 prepaid voucher includes $50 worth of minutes within 360 days and a new activation card. Consumers have additional functionalities such as Bluetooth, additional memory, and international call capabilities. Consumers can also buy the activation card and additional functionalities separately.
Identification of Questions & Alternatives
The following questions and alternatives have been identified with respect to the disclosure of each of the anticipated insurance recoveries: 1. How should Velocity Cellular recognize revenue for the Power Starterpack? Should the deliverable items be recognized separately or as a single item on the financial statements? 2. How should fees be allocated on financial statements?
Conclusions and Authoritative Reasoning
1. Velocity Cellular should recognize revenue for the activation card and the cell phone service (airtime) separately. A. ASC 605-25-05-2 describes the circumstances under which multiple deliverables may arise, multiple products may be delivered, performance may occur at different times or over different periods of time, and the customer’s payments for these deliverables may be fixed, variable, or a combination of fixed and variable. B. ASC 605-25-25-5 states that in an arrangement with