Landline Corporation is a public company with a calendar year-end

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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 

 

Landline is considering whether it should recognize revenue related to its arrangement with PRU on a gross or net basis. In doing so, Landline asks for your help. Make a memo addressing the following questions. Base your analysis of the following questions on the relevant authoritative literature and discuss the support in that literature for your conclusions.

 

1. What journal entries are necessary to appropriately account for each minute a customer spends using PRU's ''1-900'' number? 
2. Cover the following points:

• A summary of the case facts and an explanation of the accounting issue(s) that the case raises. 
• Identification and discussion of the relevant sections of the Codification that address the facts in the case. 
• Conclusions reached in applying the authoritative literature to the case facts and the questions above. 
• Any necessary journal entries.