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30E_b

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Intermediate Accounting (Kieso)
Found in: Page 1040

Short Answer

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay $10,000 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 $8,000. In addition, Walleye agrees to pay an additional $20,000 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.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler 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.

Service revenue for 3rd year is $7,000.

See the step by step solution

Step by Step Solution

Meaning of Contract Modification

A contract modification refers to the contract in which one or more areas are altered that brings new elements into the specifics or cancels some of them while keeping the contract's overall purpose and impact intact.

Journal entries for Tyler in 2019

Date

Particular

Debit ($)

Credit ($)

January 1, 2019

Cash a/c

28,000

Unearned revenue a/c

28,000

December 31, 2019

Unearned revenue a/c

7,000

Service revenue a/c

7,000

Working Notes:

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