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Chapter 18: Question BE18-21 (page 1034)

Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay \(100,000 at the beginning of each year (the standalone selling price of the service at contract inception is \)100,000 per year). At the end of the second year, the contract is modified, and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to \(80,000 (the standalone selling price of the services at the beginning of the third year is \)80,000 per year). Briefly describe the accounting for this contract modification.

Short Answer

Expert verified

$80,000 will be recorded in the third year.

Step by step solution

01

Meaning of Contract Modification

A contract modification is a change, adjustment, or alteration to a contract's scope or price (or both) that adds new rights or responsibilities or changes existing ones.

02

Accounting for the contract modification

Stengel Co. has a contract with Laplante Inc. to provide maintenance services. $100,000 each year will be the revenue for the two years in the beginning and in Stengel鈥檚 record will be credited to Laplante's account when received in cash. Due to a change in contract revenuein the third year, the disclosure will be restricted to $100,000, with a contract debit.

Costs of modification is $20,000, which must be expensed. Only $80,000 will be paid in cash from Laplante Inc. in the third year and will be deposited into their account.

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Most popular questions from this chapter

(Recognition of Profit on Long-Term Contracts) During 2017, Nilsen Company started a construction job with a contract price of \(1,600,000. The job was completed in 2019. The following information is available.

2017 2018 2019

Costs incurred to date \)400,000 \(825,000 \)1,070,000

Estimated costs to complete 600,000 275,000 鈥�0鈥�

Billings to date 300,000 900,000 1,600,000

Collections to date 270,000 810,000 1,425,000

Instructions

(b) Prepare all necessary journal entries for 2018.

Explain the importance of a contract in the revenue recognition process.

Talarczyk Company sold 10,000 Super-Spreaders on December 31, 2017, at a total price of \(1,000,000, with a warranty guarantee that the product was free of any defects. The cost of the spreaders sold is \)550,000. The assurance warranties extend for a 2-year period and are estimated to cost \(40,000. Talarczyk also sold extended warranties (service-type warranties) related to 2,000 spreaders for 2 years beyond the 2-year period for \)12,000. Given this information, determine the amounts to report for the following at December 31, 2017: sales revenue, warranty expense, unearned warranty revenue, warranty liability, and cash.

Describe the revenue recognition principle.

(Determine Transaction Price) Bill Amends, owner of Real Estate Inc., buys and sells commercial properties. Recently, he sold land for \(3,000,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the \)3,000,000 sales price, Blackhawk Group agrees to pay Real Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is \(1,000,000 a year. Given the substantial increase in online sales that are occurring in the retail market, Bill had originally indicated that he would prefer a higher price for the land instead of the 1% royalty arrangement and suggested a price of \)3,250,000. However, Blackhawk would not agree to those terms.

Instructions

What is the transaction price for the land and related royalty payment that Real Estate Inc. should record?
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