Question

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

Short answer

Service revenue each year is $10,000.

Step-by-step solution

Service Contract

Aservice contractis an agreement between a client and a service provider. A service contract is often anat-will arrangementwith no set expiration date and the ability for both parties to cancel at any time.

Journal entries for Tyler in 2017 and 2018

Date	Particular	Debit ($)	Credit ($)
January 1, 2017	Cash a/c	10,000
	Unearned revenue a/c		10,000
December 31, 2017	Unearned revenue a/c	10,000
	Service revenue a/c		10,000
January 1, 2018	Cash a/c	10,000
	Unearned revenue a/c		10,000
December 31, 2018	Unearned revenue a/c	10,000
	Service revenue a/c		10,000