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Chapter 18: Q2P_a (page 1043)

(Allocate Transaction Price, Modification of Contract) Refer to the Tablet Bundle A revenue arrangement in P18-1. In response to competitive pressure for Internet access for Tablet Bundle A, after 2 years of the 3-year contract, Tablet Tailors offers a modified contract and extension incentive. The extended contract services are similar to those provided in the first 2 years of the contract. Signing the extension and paying $90 (which equals the standalone selling of the revised Internet service package) extends access for 2 more years of Internet connection. Forty Tablet Bundle A customers sign up for this offer.

Instructions

(a) Prepare the journal entries when the contract is signed on January 2, 2019, for the 40 extended contracts. Assume the modification does not result in a separate performance obligation.

Short Answer

Expert verified

Revenue is $3,600.

Step by step solution

01

Meaning of Contract Modification

Acontract modification occurs if the contractual parties agree to modify the existing terms of a contract. Contract modification can only be legal if both parties sign the acceptance of modification.

02

Journal entries when the contract signed

Date

Particular

Debit ($)

Credit ($)

January 2, 2019

Cash a/c

3,600

Unearned service revenue a/c

3,600

Working Notes:

The services supplied during the extended time are the same as those given during the initial contract period. The adjustments will be deemed part of the original contract because they are not separate.

Unearnedrevenue=Extendedcontract脳Price=40脳$90=$3,600

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Most popular questions from this chapter

Allee Corp evaluates a revenue arrangement to determine proper revenue recognition. The contract is for the construction of 10 speedboats for a contract price of \(400,000. The customer needs the boats in its showrooms by February 1, 2018, for the boat purchase season; the customer provides a bonus payment of \)21,000 if all ships are delivered by the February 1 deadline. The bonus is reduced by $7,000 each week that the boats are delivered after the deadline until no compensation is paid if the ships are provided after February 15, 2018. Allee frequently includes such bonus terms in its contracts and thus has good historical data for estimating the probabilities of completion at different dates. It calculates an equal likelihood (25%) for each delivery outcome. What approach should Allee use to determine the transaction price for this contract? Explain.

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

Why in franchise arrangements may it be improper to recognize the entire franchise fee as revenue at the date of sale?

Kristin Company sells 300 units of its products for \(20 each to Logan Inc. for cash. Kristin allows Logan to return any unused product within 30 days and receive a full refund. The cost of each product is \)12. To determine the transaction price, Kristin decides that the approach that is most predictive of the amount of consideration to which it will be entitled is the probability-weighted amount. Using the probability-weighted amount, Kristin estimates that (1) 10 products will be returned and (2) the returned products are expected to be resold at a profit. Indicate the amount of (a) net sales, (b) estimated liability for refunds, and (c) cost of goods sold that Kristen should report in its financial statements (assume that none of the products have been returned at the financial statement date).

When must multiple performance obligations in a revenue arrangement be accounted for separately?
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