David is a mobile phone company that specialises in offering cheap mobile phone deals to students and teachers. David’s most popular phone, the GPhone is very popular with students. Customers can acquire the GPhone directly from David for £550 if they commit to a 24-month contract at £60 a month, which includes calls and data services. The £550 is paid on the first day of the contract and the £60 monthly rental is paid at the end of each month. David also offers the same 24-month call and data services (Sim Only) contract directly to customers, without providing them with a handset, for £40 a month. Customers can buy the GPhone from David with no contract for calls and data services for £1,100 and use it on any network. David pays £400 to buy each GPhone and the cost to David of the call and data services is approximately £15 per month, per contract. David has a policy of discounting relevant elements of amounts due for contracts with a length greater than 12 months, including relevant amounts due within one year on those contracts. David has determined that a monthly interest rate of 0.6434% (equivalent to an annual effective rate of approximately 8% is appropriate for this transaction. The present value of 24 payments of £1 is £22.1729.

Required

For the 24-month contract above, explain, with relevant calculations, how a single customer contract (for purchase of an GPhone with the 24-month contract) commencing on 1 June 2020 would be accounted for in David’s Statement of Profit or Loss for the year ended 31 December 2020 and the Statement of Financial Position at 31 December 2020.

Answer rating: 100% (QA)

Solution Sale of GPhone 550 Cost of GPhone 400 Contract Amount per ... View the full answer