Note 3 Equipment Installment Plans

U.S. Cellular sells devices to customers under equipment installment contracts over a specified time period. For certain equipment installment plans, 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 March 31, 2017 and December 31, 2016, the guarantee liability related to these plans was $27 million and $33 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. Because equipment installment plans have a duration of greater than twelve months, U.S. Cellular imputes interest. U.S. Cellular records imputed interest as a reduction to the related accounts receivable and recognizes it over the term of the installment agreement. Equipment installment plan receivables had a weighted average effective imputed interest rate of 11.6% and 11.2% as of March 31, 2017 and December 31, 2016, respectively.

The following table summarizes equipment installment plan receivables as of March 31, 2017 and December 31, 2016.

	March 31, 2017		December 31, 2016
(Dollars in millions)
Equipment installment plan receivables, gross	$	661	$	628
Deferred interest		(57)		(53)
Equipment installment plan receivables, net of deferred interest		604		575
Allowance for credit losses		(53)		(50)
Equipment installment plan receivables, net	$	551	$	525

Net balance presented in the Consolidated Balance Sheet as:
Accounts receivable — Due from customers and agents (Current portion)	$	356	$	345
Other assets and deferred charges (Non-current portion)		195		180
Equipment installment plan receivables, net	$	551	$	525

U.S. Cellular uses various inputs, including internal data, information from the credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represent a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:

	March 31, 2017						December 31, 2016
	Lower Risk		Higher Risk		Total		Lower Risk		Higher Risk		Total
(Dollars in millions)
Unbilled	$	582	$	44	$	626	$	553	$	38	$	591
Billed — current		20		2		22		23		2		25
Billed — past due		10		3		13		10		2		12
Equipment installment plan receivables, gross	$	612	$	49	$	661	$	586	$	42	$	628

The activity in the allowance for credit losses balance for the equipment installment plan receivables was as follows:

	March 31, 2017		March 31, 2016
(Dollars in millions)
Allowance for credit losses, beginning of period	$	50	$	26
Bad debts expense		15		11
Write-offs, net of recoveries		(12)		(9)
Allowance for credit losses, end of period	$	53	$	28