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. When a customer exercises the trade-in option, both the outstanding receivable and guarantee liability balances related to the respective device are reduced to zero, and the value of the used device that is received in the transaction is recognized as inventory. If the customer does not exercise the trade-in option at the time of eligibility, U.S. Cellular begins amortizing the liability and records this amortization as additional equipment revenue. As of September 30, 2017 and December 31, 2016, the guarantee liability related to these plans was $20 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 12.2% and 11.2% as of September 30, 2017 and December 31, 2016, respectively.

The following table summarizes equipment installment plan receivables as of September 30, 2017 and December 31, 2016.

	September 30, 2017		December 31, 2016
(Dollars in millions)
Equipment installment plan receivables, gross	$	776	$	628
Deferred interest		(69)		(53)
Equipment installment plan receivables, net of deferred interest		707		575
Allowance for credit losses		(58)		(50)
Equipment installment plan receivables, net	$	649	$	525

Net balance presented in the Consolidated Balance Sheet as:
Accounts receivable — Customers and agents (Current portion)	$	387	$	345
Other assets and deferred charges (Non-current portion)		262		180
Equipment installment plan receivables, net	$	649	$	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:

	September 30, 2017						December 31, 2016
	Lower Risk		Higher Risk		Total		Lower Risk		Higher Risk		Total
(Dollars in millions)
Unbilled	$	713	$	24	$	737	$	553	$	38	$	591
Billed — current		26		1		27		23		2		25
Billed — past due		10		2		12		10		2		12
Equipment installment plan receivables, gross	$	749	$	27	$	776	$	586	$	42	$	628

Activity for the nine months ended September 30, 2017 and 2016, in the allowance for credit losses balance for the equipment installment plan receivables was as follows:

	September 30, 2017		September 30, 2016
(Dollars in millions)
Allowance for credit losses, beginning of period	$	50	$	26
Bad debts expense		42		46
Write-offs, net of recoveries		(34)		(28)
Allowance for credit losses, end of period	$	58	$	44