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Chapter 18: Q31Q. (page 1031)

Explain the accounting for contract modifications.

Short Answer

Expert verified

If the modification results in creating a new performance requirement, that performance obligation should be monitored independently.

Step by step solution

01

Meaning of Contract Modification

A contract modification refers to a modification, change, or alteration in the scope or price (or both) of a contract that adds new rights or duties or alters existing ones.

02

Accounting for contract modification

If a contract modification occurs as a result of a change in an entity's contract with a customer, the products and services and their selling prices must be evaluated. Depending on whether such commodities and services are separate or supplied at their stand-alone selling pricing, a change can be accounted for as follows:

There is a separate contract.

  • If the amendment is not accounted for as a distinct contract, one of the following options:
  • The previous contract will be terminated, and a new contract will be created (with no adjustment to the historical accounting).
  • The amendment was paired with a cumulative catch-up adjustment to revenue under the original contract.
  • The economics of the transaction are accurately reflected by a combination of the two sub-bullet points above.

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Most popular questions from this chapter

(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for \(200,000. In addition, as part of the contract, a performance bonus of \)40,000 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Instructions

(a) Determine the transaction price that Concrete Always should compute for this agreement.

(b) Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 90% and otherwise it will be finished 1 week late, determine the transaction price.

What is the nature of a sale on consignment?

Jupiter Company sells goods to Danone Inc. by accepting a note receivable on January 2, 2017. The goods have a sales price of \(610,000 (cost of \)500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2017, Danone makes payment to Jupiter for the full sales price.

Instructions

(a) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the net method.

(b) Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter Company on January 2, 2017, and the payment on January 28, 2017. Assume that Jupiter Company records the January 2, 2017, transaction using the gross method.

How should a franchisor account for continuing franchise fees and routine sales of equipment and supplies to franchisees?

Refer to the information in Question 14. Assume that Allee has limited experience with a construction project on the same scale as the ten speedboats. How does this affect the accounting for the variable consideration?
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