91Ó°ÊÓ

(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

(b) Prepare the journal entries on December 31, 2019, for the 40 extended contracts (the first year of the revised 3-year contract).

Step by step solution

01

Meaning of Contract Modification

When the both the parties of a contractagree to change the terms of their original contract, this is known as a contract modification.

02

Journal entries on December 31, 2019

Date	Particular	Debit ($)	Credit ($)
December 31, 2019	Unearned service revenue a/c	2,413
	Service revenue a/c		2,413

Working Notes:

$\begin{array}{rcl}\mathbf{Original}\mathbf{}\mathbf{internet}\mathbf{}\mathbf{service}\mathbf{}\mathbf{cost}& \mathbf{=}& \mathbf{Extended}\mathbf{}\mathbf{contract}\mathbf{×}\mathbf{Revenue}\mathbf{}\mathbf{allocation}\mathbf{}\mathbf{to}\mathbf{}\mathbf{collection}\\ & \mathbf{=}& \mathbf{40}\mathbf{×}\mathbf{\$}\mathbf{273}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{290}\end{array}$

$\begin{array}{rcl}\mathbf{Revenue}\mathbf{}\mathbf{recognized}\mathbf{}\mathbf{in}\mathbf{}{\mathbf{1}}^{\mathbf{st}}\mathbf{}\mathbf{two}\mathbf{}\mathbf{years}& \mathbf{=}& \mathbf{Original}\mathbf{}\mathbf{internet}\mathbf{}\mathbf{service}\mathbf{}\mathbf{contract}\mathbf{×}\frac{\mathbf{2}}{\mathbf{3}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{290}\mathbf{×}\frac{\mathbf{2}}{\mathbf{3}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{280}\end{array}$

$\begin{array}{rcl}\mathbf{Remaining}\mathbf{}\mathbf{service}\mathbf{}\mathbf{at}\mathbf{}\mathbf{original}\mathbf{}\mathbf{rates}& \mathbf{=}& \mathbf{Original}\mathbf{}\mathbf{internte}\mathbf{}\mathbf{service}\mathbf{}\mathbf{contract}\mathbf{-}\mathbf{Revenue}\mathbf{}\mathbf{recognized}\mathbf{}\mathbf{in}\mathbf{}{\mathbf{1}}^{\mathbf{st}}\mathbf{}\mathbf{two}\mathbf{}\mathbf{years}\\ & \mathbf{=}& \mathbf{\$}\mathbf{10}\mathbf{,}\mathbf{290}\mathbf{-}\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{280}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{640}\end{array}$

Extended service = $3,600

$\begin{array}{rcl}\mathbf{Total}\mathbf{}\mathbf{revenue}& \mathbf{=}& \mathbf{Remaining}\mathbf{}\mathbf{service}\mathbf{}\mathbf{at}\mathbf{}\mathbf{original}\mathbf{}\mathbf{rates}\mathbf{+}\mathbf{Extended}\mathbf{}\mathbf{service}\\ & \mathbf{=}& \mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{640}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{600}\\ & \mathbf{=}& \mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{240}\end{array}$

$\begin{array}{rcl}\mathbf{Revenue}\mathbf{}\mathbf{for}\mathbf{}\mathbf{first}\mathbf{}\mathbf{year}& \mathbf{=}& \frac{\mathbf{Total}\mathbf{}\mathbf{revenue}}{\mathbf{3}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{7}\mathbf{,}\mathbf{240}}{\mathbf{3}}\\ & \mathbf{=}& \mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{413}\end{array}$

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