Note 3 Equipment Installment Plans

U.S. Cellular offers customers, through its owned and agent distribution channels, the option to purchase certain devices under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. U.S. Cellular values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. As of June 30, 2016 and December 31, 2015, the guarantee liability related to these plans was $66 million and $93 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.

U.S. Cellular equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, U.S. Cellular imputes interest. Equipment installment plan receivables had a weighted average effective imputed interest rate of 10.2% and 9.7% as of June 30, 2016 and December 31, 2015, respectively.

The following table summarizes unbilled equipment installment plan receivables as of June 30, 2016 and December 31, 2015. Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.

	June 30, 2016		December 31, 2015
(Dollars in millions)
Short-term portion of unbilled equipment installment plan receivables, gross	$	314	$	279
Short-term portion of unbilled deferred interest		(28)		(21)
Short-term portion of unbilled allowance for credit losses		(19)		(14)
Short-term portion of unbilled equipment installment plan receivables, net	$	267	$	244

Long-term portion of unbilled equipment installment plan receivables, gross	$	127	$	76
Long-term portion of unbilled deferred interest		(6)		(2)
Long-term portion of unbilled allowance for credit losses		(10)		(6)
Long-term portion of unbilled equipment installment plan receivables, net	$	111	$	68

U.S. Cellular assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of U.S. Cellular’s customers on equipment installment plans are similar to those of U.S. Cellular customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a deposit for equipment purchased through an installment contract.

U.S. Cellular recorded out-of-period adjustments during the six months ended June 30, 2015 due to errors related to equipment installment plan transactions that were attributable to 2014. U.S. Cellular determined that these adjustments were not material to the quarterly periods or the annual results for 2015. These equipment installment plan adjustments had the impact of reducing Equipment sales revenues by $6 million for both the three and six months ended June 30, 2015, and Income before income taxes by $5 million and $6 million, for the three and six months ended June 30, 2015, respectively.