This case is adapted from Alford, et al., 2011, Issues in Accounting Education, Vol. 26, No. 3, pp. 609-618.
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: The most relevant FASB Codification is 605-45-45-3 through 605-45-45-18. Label your answers by requirement.
(1) Should Landline recognize revenue gross (i.e., as a principal) for the total amount billed to the customer ($5/minute) for their time spent using the "1-900" number, or net (i.e., as an agent) for the amount retained by Landline ($1/minute)? For this requirement, briefly explain the requirements of the Codification, but do not quote it. Your answer should start by citing the case facts supporting reporting revenue under the Gross method ($5/minute). If the Codification states that the factor is "strong" or "weak," you should note this. Your answer should then cite the case facts supporting reporting revenue Net ($1 minute). Your conclusion should logically follow from the prior information.
(2) Assume landline sold 1,000,000 minutes. Assume all expenses, if any, are discussed explicitly in the case. How much is Landline's gross profit if they use (a) the Gross method? (b) the Net method? This requirement is not a discussion question. Do not provide support for your answer. You are only asked for numerical final answers.