Revenue Recognition

On January 1, 2017, Spring Fashions. Inc. enters into a contract with southeast retail company to provide 500 dresses for $62,500 ($125 per dress) over the next 10 months. On October 1, 2017, after 450 dresses had been delivered, the contract is modified. The new contract adds the delivery of shoes in addition to the remaining dresses. Specifically the contract specifies that the company will deliver 50 pairs of shoes on November 1 and they will deliver the remaining 50 dresses on December 1. The retail company will pay $100 for each pair of shoes. Spring Fashions normally sells the related shoes for $180 per pair.

A. Which of the following best describes this situation?

-the modification created a new, separate contract

-the modification did not create a new contract. Use the prospective method.

-the modification did not create a new contract. Use the cumulative-catch up method.

B. Prepare the journal entry Spring Fashion would have made prior to the contract modification when the initial dresses are delivered. Assume they have received no payment yet.

C. Prepare the journal entry or entries Spring Fashion would have made when the remaining dresses and shoes are delivered after the modification.