Question 7

Recording Revenue Under a Contract Modification

Traders Inc. enters into a three-year office maintenance contract with its customer for $672,000 ( $224,000 per year, to be paid at the end of each year). The $224,000 per year is the standalone selling price for a year of maintenance service. At the end of the second year, both parties agree to modify the maintenance contract as follows: (1) the fee for the third year is reduced to $176,000 to be paid at the end of Year 3, and (2) the contract is extended to Year 4 and Year 5 for $320,000 ( $160,000 per year, to be paid at the end of each year). The standalone selling price for one year of service at the time of modification is $192,000. Maintenance fees are billed annually by Traders Inc.

Required Answer the following questions, rounding each answer to the nearest whole dollar. Assume any payments due were received in cash. a. Record Traders Inc.s journal entry to recognize revenue for each of the first two years of the contract.

	Account Name	Dr.	Cr.
Dec. 31, Year 1	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	To record revenue.
Dec. 31, Year 2	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	To record revenue.

b. Record Traders Inc.s journal entry to recognize revenue for each of the years three through five of the contract, taking into account the contract modification. Assume cash payments.

	Account Name	Dr.	Cr.
Dec. 31, Year 3	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	To record revenue.

	Account Name	Dr.	Cr.
Dec. 31, Year 4	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	To record revenue.

	Account Name	Dr.	Cr.
Dec. 31, Year 5	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	Accounts ReceivableCashContract AssetCost of Goods SoldDeferred Service RevenueInventoryService RevenueN/A
	To record revenue.