JustKitchens Inc. provides services to restaurants and hotels. The company supplies paper products, tableware, cookware, restaurant and kitchen equipment, and cleaning supplies. On January 2, 2019, Just-Kitchens enters into a contract with a local restaurant chain to provide its services for 3 years at a cost of $10,000 per year. The restaurant chain pays the total contract fee on January 2, 2019. JustKitchens’s stand-alone selling price is also $10,000 per year.
After 2 years, the restaurant asks to modify the contract. On January 2, 2021, the companies agree to reduce the fee for the third year to $9,000 in exchange for extending the contract for 2 additional years at a fee of $11,000 per year. This modification is agreed to by both parties, and on that date the restaurant chain pays for the additional 2 years of service. The $11,000 fee for the additional years is the same as JustKitchens’s stand-alone price.
Required:
- 1. How should JustKitchens account for the contract modification?
- 2. Prepare the
journal entry that JustKitchens would make over the life of the contract.
1.
State the manner in which the Company J should account for the contract modification.
Explanation of Solution
Contract modification:
In a contract, Companies generally modify the respective rights and performance obligations. An agreed-upon change in the goods or services that must be delivered or the contract’s price is known as a contract modification and it is also referred as contract amendment or change order.
The price and length of the contract is affected by contract modification. Furthermore, the contract modification enhances distinctive services. Though, the price does not increase by an amount equal to the stand-alone selling price on the date of the contract modification [new 3-year price is $31,000 versus stand-alone price of $33,000
2.
Journalize entry over the life of the contract.
Explanation of Solution
Contract:
Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be written, oral or implied by ordinary business practices.
Journal entry:
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.
Prepare journal entries:
Date | Account title and explanation | Debit ($) | Credit ($) |
January 2,2019 | Cash (1) | 30,000 | |
Unearned Service Revenue | 30,000 | ||
( To record the cash collected for the three years of contract) | |||
December 31,2019 | Unearned Service Revenue | 10,000 | |
Service Revenue | 10,000 | ||
(To record the unearned service revenue) | |||
December 31,2020 | Unearned Service Revenue | 10,000 | |
Service Revenue | 10,000 | ||
(To record the unearned service revenue) | |||
January 2,2021 | Cash (2) | 21,000 | |
Unearned Service Revenue | 21,000 | ||
(To record the contract price for one year and fees for additional two years) | |||
December 31,2021 | Unearned Service Revenue (3) | 10,333.33 | |
Service Revenue | 10,333.33 | ||
(To record the unearned service revenue) | |||
December 31,2022 | Unearned Service Revenue (4) | 10,333.33 | |
Service Revenue | 10,333.33 | ||
(To record the unearned service revenue) | |||
December 31,2023 | Unearned Service Revenue (5) | 10,333.33 | |
Service Revenue | 10,333.33 | ||
(To record the unearned service revenue) |
Table (1)
Working notes:
(1)Calculate the amount of cash on January 2, 2019:
(2)Calculate the amount of cash on January 2, 2021:
(3)Calculate the amount of unearned service revenue on December 31, 2021:
(4)Calculate the amount of unearned service revenue on December 31, 2022:
(5)Calculate the amount of unearned service revenue on December 31, 2023:
(6)Calculate the amount of difference between existing contract price and modified contract price for each year:
Note: 3 years is taken from 2021 to January 2023 (additional two years).
Want to see more full solutions like this?
Chapter 17 Solutions
Intermediate Accounting: Reporting And Analysis
- On January 1, 2019, Mopps Corp. agrees to provide Conklin Company 3 years of cleaning and janitorial services. The contract sets the price at 12,000 per year, which is the normal standalone price that Mopps charges. On December 31, 2020, Mopps and Conklin agree to modify the contract. Mopps reduces the fee for the third year to 10,000, and Conklin agrees to a 4-year extension that will extend services through December 31, 2024, at a price of 15,000 per year. At the time that the contract is modified, Mopps is charging other customers 13,500 for the cleaning and janitorial service. Required: Should Mopps and Conklin treat the modification as a separate contract? If so how should Mopps account for the contract modification on December 31, 2020? Support your opinion by discussing the application to this case of the factors that need to be considered for determining the accounting for contract modifications.arrow_forwardOn June 1, 2020, Vaughn Company sells $193,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Vaughn to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2020, and ShopBarb pays in full. Prepare the journal entriesarrow_forwardDelta Spirit, Inc. entered into a contract to sell equipment to Wilco, LLC on October 1, 2021. Along with the equipment, Delta Spirit will provide one-year maintenance services on an as-needed basis, beginning once the equipment is installed. Delta Spirit offers similar services to other customers that purchased equipment sold by other vendors for $20,000. Delta Spirit will also provide installation services at no additional cost, a service that Delta Spirit typically charges $10,000. The equipment normally sells for $170,000 on its own. For the package deal, Wilco agrees to pay a total of $180,000. The equipment was delivered and installed on November 1, 2021. Wilco paid the entire invoice in cash on the delivery and installation date. How much revenue should Delta Spirit allocate to the various performance obligations in the above contract (round to the nearest dollar, if needed)?arrow_forward
- On June 1, 2020, Mills Company sells $200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2020, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that conditions for recognizing the sale as a bill-and-hold sale have been met) for Mills on June 1 and September 1, 2020. The cost of the shelving units to Mills is $110,000.arrow_forwardJillian Inc. manufactures and installs customized equipment. On January 1, 2021, Jillian entered into a contract to sell equipment to a client for $800,000. This amount included installation. The company normally charges an additional fee for its installation services, but in this case, the installation was "bundled" with the equipment. The standalone value of the machinery was $750,000 while the cost of the installation was estimated at $100,000. Jillian had the equipment in its inventory on January 1, 2021. The equipment, which had a cost of $600,000, was customized (at no cost Jillan), and delivered to the client and installed on that date. Payment terms are as follows: January 1, 2021: $80,000 upon contract signing and delivery and installation. December 31, 2021; Balance due. Jillian Inc. follows IFRS and estimates that the interest rate for a similar financing arrangement would be 6%. Required: a. Apply the steps of IFRS 15 Revenue Recognition to this transaction. State each step…arrow_forwardOn July 1, 2021, Concord Inc. entered into a contract to deliver one of its specialty machines to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $5,400 in advance on July 15, 2021. Kickapoo pays Concord on July 15, 2021, and Concord delivers the machine (with cost of $2,100) on July 31, 2021. Prepare the journal entry on July 1, 2021, for Concord. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit eTextbook and Media List of Accounts Prepare the journal entry on July 15, 2021, for Concord. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account…arrow_forward
- FORD, INC., a dealer of household appliances, sells washing machines at an average price of P8,100. The company also offers to each customer a separate 3-year warranty contract for P810 that requires the company to provide periodic maintenance services and to replace defective parts. During 2019, FORD sold 300 washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 31, 2019. FORDS’s policy is to recognize income from the warranties on a straight-line basis. In 2020, FORD incurred actual costs relative to 2019 warranty sales of P18,000 for parts and P36,000 for labor. What liability relative to the 2019 warranties would appear on the December 31, 2020, statement of financial position and how would it be classified? Current Noncurrent Group of answer choices P145,800 P 0 P72,900 P145,800 P72,900 P72,900 P145,800 P72,900arrow_forwardOn January 1, 2020, Gordon Co. enters into a contract to sell a customer a wiring base and shelving unit that sits on the base in exchange for $3,000. The contract requires delivery of the base first but states that payment for the base will not be made until the shelving unit is delivered. Gordon identifies two performance obligations and allocates $1,200 of the transaction price to the wiring base and the remainder to the shelving unit. The cost of the wiring base is $700; the shelves have a cost of $320. Instructions a. Prepare the journal entry on January 1, 2020, for Gordon. b. Prepare the journal entry on February 5, 2020, for Gordon when the wiring base is delivered to the customer. c. Prepare the journal entry on February 25, 2020, for Gordon when the shelving unit is delivered to the customer and Gordon receives full payment.arrow_forwardOn July 1, 2021, Blossom Inc. entered into a contract to deliver one of its specialty machines to Kickapoo Landscaping Co. The contract requires Kickapoo to pay the contract price of $5,600 in advance on July 15, 2021. Kickapoo pays Blossom on July 15, 2021, and Blossom delivers the machine (with cost of $2,000) on July 31, 2021. (a) Prepare the journal entry on July 1, 2021, for Blossom. (b) Prepare the journal entry on July 15, 2021, for Blossom. (c) Prepare the journal entry on July 31, 2021, for Blossom. (To record contract price paid) and (To record cost of machine)arrow_forward
- On July 15, 2021, Ortiz & Co. signed a contract to provide EverFresh Bakery with an ingredient-weighing system for a price of $88,800. The system included finely tuned scales that fit into EverFresh's automated assembly line, Ortiz's proprietary software modified to allow the weighing system to function in EverFresh's automated system, and a one- year contract to calibrate the equipment and software on an as-needed basis. (Ortiz competes with other vendors who offer ongoing calibration contracts for Ortiz's systems.) If Ortiz was to provide these goods or services separately, it would charge $59,000 for the scales, $10,000 for the software, and $31,000 for the calibration contract. Ortiz delivered and installed the equipment and software on August 1, 2021, and the calibration service commenced on that date. Assume that the scales, software and calibration service are viewed as one performance obligation. How much revenue will Ortiz recognize in 2021 for this contract? Multiple Choice O…arrow_forwardOn February 12, 2020, Guy Sebastian Gardening Services enters into a contract with a local business to provide a weekly grass cutting services between May 1 and September 30 of that year, and received P2,000 in advance. As part of a local business promotion, Guy Sebastian offers a 50% discount on any gardening tools it also sells with a list price in excess of P200. In the past, Guy Sebastian charged the same amount (P2,000) for the same weekly grass cutting service, but without the gardening tool discount coupon. Based on historical experience with other clients, Guy estimates that about 40% of the coupons will be redeemed, purchasing tools with an average total list price of P400. Guy prepares its annual financial statement every June He has performed the needed grass cutting services needed for the current fiscal year. How much revenue (rounded to the nearest peso) should Guy Sebastian recognize in its June 30, 2020 income statement arising from the above contract?arrow_forwardFlapper Jack's Pancake Restaurants Inc. sells franchises for an initial fee of $38,000 plus operating fees of $700 per month. The initial fee covers site selection, training, computer and accounting software, and on-site consulting and troubleshooting, as needed, over the first five years. On March 15, 2020, Tim Cruise signed a franchise contract, paying the standard $6,400 down with the balance due over five years with interest. Assuming that the initial services to be performed by Flapper Jack's subsequent to the signing are substantial and that collection of the receivable is reasonably assured, the journal entry required at signing would include a credit to: Multiple Choice O Deferred revenue for $38,000. Deferred revenue for $31,600. Franchise fee revenue for $38,000. Franchise fee revenue for $6,400.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning