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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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Assume the same facts as in RE17-2. If Yankee determines that the additional services are distinct from the goods and services transferred in the original contract, how would it account for the modification?

To determine

State the manner in which the modification is accounted.

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.

  • Corporation Y might use a “prospective approach” under which it treats the original contract ended and a new contract created. The amount of consideration of a new contract is $116,800 (1).
  • Corporation Y might recognize revenue of $3,650 per month ($116,800(1)÷32 months)  as services are provided over the continuing 32 months of the contract.

Working note:

(1)Compute the consideration of a new contract:

Considerationofanewcontract}=[(Amountoffees

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