Question
A performs bookkeeping and tax- reporting services to startup companies. On January 1, 2018, A entered into a 3-year service contract with B. B promises
A performs bookkeeping and tax- reporting services to startup companies. On January 1, 2018, A entered into a 3-year service contract with B. B promises to pay $9,000 at the beginning of each year, which at contract inception is the stand-alone 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, B agrees to pay an additional $22,000 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.
1. Prepare the journal entries for the A in 2018 related to this service contract. (1) on January 1, 2018 and (2) on December 31, 2018
2. Prepare the journal entries for B in 2020 related to the modified service contract, assuming the addition of the service is not a separate contract. (1) on January 1, 2020 and (2) on December 31, 2020.
3. Assuming A and B 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, (1) prepare the journal entry on December 31, 2020. (2) What are required to treat the modification as a separate contract.
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