Telephone Sellers Inc. Financial Analysis: Income Recognition for Prepaid Telephone Cards Sales

Income Recognition for Prepaid Telephone Cards Sales

Telephone Sellers Inc. sells prepaid telephone cards to customers. Telephone Sellers then pays the telecommunications company, TeleExpress, for the actual use of its telephone lines related to the prepaid telephone cards. Assume that Telephone Sellers sells $4,000 of prepaid cards in January 2020. It then pays TeleExpress based on usage, which turns out to be 50% in February, 30% in March, and 20% in April. The total payment by Telephone Sellers for TeleExpress lines over the 3 months is $3,000.

Questions: Determine the income for each month. Answer: January: zero February Income: $1,000 March Income: $200 April Loss: $200 Explanation: As accounting uses an accrual basis rather than a cash basis to recognize results these revenues will be recognized as the customer uses. $4,000 x 50% Feb = $2,000 revenue in February $4,000 x 30% March = $1,200 revenue in March $4,000 x 20% April = $800 revenue in April. The $3,000 expenses will be distributed equally among each month, that is $1,000 per month. Income for February: $2,000 - $1,000 = $1,000 Income for March: $1,200 - $1,000 = $200 Income for April: $800 - $1,000 = -$200 (this is a loss) January will have no income as no expenses were incurred and no gain accrued.
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