Question

Metlock Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2020, Metlock entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,700 at the beginning of each year, which at contract inception is the standalone 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 $8,600. In addition, Walleye agrees to pay an additional $21,400 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.

Prepare the journal entries for Metlock in 2020 and 2021 related to this service contract. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Prepare the journal entries for Metlock in 2022 related to the modified service contract, assuming a prospective approach. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Repeat the requirements for part (b), assuming Metlock and Walleye 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. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No entry" for the account titles and enter 0 for the amounts.)

Answer 1

1) The journal entries for Metlock in 2020 and 2021 related to this service contract:

Date Account title Debit ($) Credit ($)

1-1-2020 cash 10,700

unearned revenue 10,700   

31-12-2020     unearned revenue 10,700   

service revenue 10,700

1-1-2021 cash 10,700

unearned revenue 10,700   

31-12-2021 unearned revenue 10,700   

service revenue 10,700

2) The journal entries for Metlock in 2022 related to the modified service contract:

1-1-2022 cash 30,000

unearned revenue    30,000

31-12-2022   unearned revenue 7,500

service revenue 7,500

(30000/4)

3) Assuming Metlock and Walleye 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.

1-1-2022 cash 30,000

unearned revenue    30,000

31-12-2022   unearned revenue 8,600

service revenue 8,600

---------HOPE THIS IS HELPFUL