JustKitchens Inc. provides services to restaurants and hotels. The company supplies paper products, tableware, cookware, restaurant and kitchen equipment, and cleaning supplies. On January 2, 2017, Just Kitchens enters into a contract with a local restaurant chain to provide its services for 3 years at a cost of $ 10,000 per year. The restaurant chain pays the total contract fee on January 2, 2017. JustKitchens’s stand alone selling price is also $ 10,000 per year. After 2 years, the restaurant asks to modify the contract. On January 2, 2019, the companies agree to reduce the fee for the third year to $ 9,000 in exchange for extending the contract for 2 additional years at a fee of $ 11,000 per year. This modification is agreed to by both parties, and on that date the restaurant chain pays for the additional 2 years of service. The $ 11,000 fee for the additional years is the same as JustKitchens’s stand alone price.
Required:
1. How should JustKitchens account for the contract modification?
2. Prepare the journal entry that JustKitchens would make over the life of the contract.