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Chapter 18: Question BE18-21 (page 1034)

Stengel Co. enters into a 3-year contract to perform maintenance service for Laplante Inc. Laplante promises to pay \(100,000 at the beginning of each year (the standalone selling price of the service at contract inception is \)100,000 per year). At the end of the second year, the contract is modified, and the fee for the third year of service, which reflects a reduced menu of maintenance services to be performed at Laplante locations, is reduced to \(80,000 (the standalone selling price of the services at the beginning of the third year is \)80,000 per year). Briefly describe the accounting for this contract modification.

Short Answer

Expert verified

$80,000 will be recorded in the third year.

Step by step solution

01

Meaning of Contract Modification

A contract modification is a change, adjustment, or alteration to a contract's scope or price (or both) that adds new rights or responsibilities or changes existing ones.

02

Accounting for the contract modification

Stengel Co. has a contract with Laplante Inc. to provide maintenance services. $100,000 each year will be the revenue for the two years in the beginning and in Stengel’s record will be credited to Laplante's account when received in cash. Due to a change in contract revenuein the third year, the disclosure will be restricted to $100,000, with a contract debit.

Costs of modification is $20,000, which must be expensed. Only $80,000 will be paid in cash from Laplante Inc. in the third year and will be deposited into their account.

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Most popular questions from this chapter

Presented below are three revenue recognition situations.

(a) Groupo sells goods to MTN for \(1,000,000, payment due at delivery.

(b) Groupo sells goods on account to Grifols for \)800,000, payment due in 30 days.

(c) Groupo sells goods to Magnus for \(500,000, payment due in two installments, the first installment payable in 18 months and the second payment due 6 months later. The present value of the future payments is \)464,000.

Indicate the transaction price for each of these situations and when revenue will be recognized.

What qualitative and quantitative disclosures are required related to revenue recognition?

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

When must multiple performance obligations in a revenue arrangement be accounted for separately?

Shaw Company sells goods that cost \(300,000 to Ricard Company for \)410,000 on January 2, 2017. The sales price includes an installation fee, which has a standalone selling price of \(40,000. The standalone selling price of the goods is \)370,000. The installation is considered a separate performance obligation and is expected to take 6 months to complete.

Instructions

(b) Shaw prepares an income statement for the first quarter of 2017, ending on March 31, 2017 (installation was completed on June 18, 2017). How much revenue should Shaw recognize related to its sale to Ricard?
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