Question

JustKitchens Inc. provides services to restaurants and hotels. The company supplies paper products, tableware, cookware, restaurant and kitchen equipment, and cleaning supplies. On January 2, 2017, Just- Kitchens enters into a contract with a local restaurant chain to provide its services for 3 years at a cost of $10,000 per year. The restaurant chain pays the total contract fee on January 2, 2017. JustKitchens’s stand-alone selling price is also $10,000 per year. After 2 years, the restaurant asks to modify the contract. On January 2, 2019, the companies agree to reduce the fee for the third year to $9,000 in exchange for extending the contract for 2 additional years at a fee of $11,000 per year. This modification is agreed to by both parties, and on that date the restaurant chain pays for the additional 2 years of service and deducts $1,000 for the adjustment to the original contract. The $11,000 fee for the additional years is the same as JustKitchens’s stand-alone price.

Required:

1. How should JustKitchens account for the contract modification?

2. Prepare the journal entries that JustKitchens would make over the life of the contract.

Answer 1

1) In the above case, Just Kitchen has agreed to the modifiaction on January 2, 2019 for reducing the fees for the 3rd year to $ 9000, in exchange for extending the contract for 2 additional years at a fee of $ 11000 per year, So at the end of 3rd year, there will be an advance standing of $ 10000 received from a local restaurant on January 2, 2017, it will book the income of $ 9000 in the 3rd year and the balance $ 1000 will be carried forward which will be adjusted in 4th year.

2) Journal Entries

Particulars	Debit	Credit
1st Year
1) Jan 2, 2017 advance received
Cash (10000 each for 3 year)	30000
Advance from Customer		30000
2) At the end of 1st year - Revenue Recognition
It will book the revenue of $ 10000 for 1st year
Advance from Cuistomer	10000
Service Revenue		10000
2nd Year
3) At the end of 2nd Year - Revenue Recognition
It will book the revenue of $ 10000 for 2nd year
Advance from Customer	10000
Service Revenue		10000
3rd Year
4) At the end of 3rd Year - Revenue Recognition
Justkitchen has agreed to S9000 for the 3rd Year, so it will book the revenue of $ 3000 in the 3rd Year
Advance from Customer	9000
Service Revenue		9000
5) Advance received for additional 2 years
Customer has agreed to pay $ 11000 per year for 2 years after deducting the balance $ 1000 remaining
Cash (11000*2 -1000)	21000
Advance from Customer		21000
4th Year
6) Revenue Recognition of $ 11000 at the end of 4th Year
Advance from Customer	11000
Service Revenue		11000
5th Year
7) Revenue Recognition of $ 10000 at the end of 5th year
Advance from Customer	11000
Service Revenue		11000

At the end of 5th year, there is no outstanding balance in Advance from Customer Account