E18-4B (Contract Modification)

Dolan Financial Services performs bookkeeping and tax-

reporting services to startup companies in the Hiawatha area. On January 1, 2014, Dolan entered

into a 3-year service contract with Lindsey Tech. Lindsey promises to pay $12,000 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 $10,000. In addition, Lindsey agrees to pay an additional $25,000 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 Dolan in 2014 and 2015 related to this service contract.

(b)

Prepare the journal entries for Dolan in 2016 related to the modified service contract,

assuming a prospective approach.

(c)

Repeat the requirements for part (b), assuming Dolan and Lindsey 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.