Question

A performs bookkeeping and tax- reporting services to startup companies. On January 1, 2018, A entered into a 3-year service contract with B. B promises to pay $9,000 at the beginning of each year, which at contract inception is the stand-alone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to $8,000. In addition, B agrees to pay an additional $22,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

1. Prepare the journal entries for the A in 2018 related to this service contract. (1) on January 1, 2018 and (2) on December 31, 2018

2. Prepare the journal entries for B in 2020 related to the modified service contract, assuming the addition of the service is not a separate contract. (1) on January 1, 2020 and (2) on December 31, 2020.

3. Assuming A and B agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation, (1) prepare the journal entry on December 31, 2020. (2) What are required to treat the modification as a separate contract.

Answer 1

A)
Date	Account Titles	Debit	Credit
1-Jan-18	Cash	$ 9,000
	Unearned revenue		$ 9,000
31-Dec-18	Unearned revenue	$ 9,000
	Service revenue		$ 9,000
B)
1-Jan-20	Cash	$30,000
	Unearned revenue (8000+22000)		$30,000
31-Dec-20	Unearned revenue	$ 7,500
	Service revenue (30000/4)		$ 7,500
C)
31-Dec-20	Unearned revenue	$ 8,000
	Service revenue		$ 8,000

The contract modification is treated as a separate contract in the event of meeting both the conditions as follows:

1. The contract modifications result in adding distinct goods and services-the the promised goods and services are distinct and separate from the other goods and services promised in the contract.

2. The additional goods and services increase the price of the contract by an amount of consideration that represents the company’s stand-alone prices.