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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Morgan Company and its customer agree to modify their existing contract. Under which of the following situations would the modification result in a new contract?

  1. a. The modification adds distinct goods or services, and the contract price increases by an amount that reflects die stand-alone selling price of additional goods or services.
  2. b. The modification only affects the transaction price.
  3. c. The modification adds distinct goods or services but does not change the contract price.
  4. d. The modification does not add distinct goods or services but does not affect the transaction price.

To determine

Identify the option under which the modification will result in a new contract.

Explanation

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.

Justification for the incorrect option b:

Modification will not result in a new contract only “if the transaction price is affected”. Therefore, it is an incorrect option. Therefore, it is the incorrect option.

Justification for the incorrect option c and d:

“The modification adds distinct goods and services and also increases the price of the contract” by an amount of consideration reflecting the company’s “stand-alone selling price” of the additional “promised goods and services”. Therefore, it is an incorrect option. Therefore, it is the incorrect option. Therefore, these are incorrect options...

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